UNITED STATES
                       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 March 31, 2006

( )   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 502
                                Chicago, IL 60610
                                -----------------
                    (Address of Principal Executive Offices)

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

                                       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


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


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, AT MAY 30, 2006:                     246,537,401


Transitional Small Business Disclosure Format (check one):   Yes     No   X


<PAGE>


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


                                TABLE OF CONTENTS


                                                                            Page
PART I. -- FINANCIAL INFORMATION

Item 1.  Financial Statements

            a) Consolidated Balance Sheets -- March 31, 2006
                 (unaudited) and December 31, 2005.............................3

            b) Consolidated Statements of Operations -- Three months ended
                 March 31, 2006 and March 31, 2005 (unaudited).................4

            c) Consolidated Statements of Cash Flows -- Three months ended
                 March 31, 2006 and March 31, 2005 (unaudited).................5

            d) Notes to Consolidated Financial Statements......................6

Item 2.  Management's Discussion and Analysis or Plan of Operation............16

Item 3.  Controls and Procedures..............................................19

PART II. -- OTHER INFORMATION

Item 1.  Legal Proceedings....................................................20

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........20

Item 3.  Defaults upon Senior Securities..................................... 21

Item 4.  Submission of Matters to a Vote of Security Holders..................22

Item 5.  Other Information....................................................22

Item 6.  Exhibits.............................................................22

SIGNATURES....................................................................23

EXHIBIT INDEX.................................................................24

<PAGE>


PART I. -- FINANCIAL INFORMATION

Item 1.  Financial Statements

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

<TABLE>
<CAPTION>
                                                                                     March 31,   December 31,
                                                                                       2006          2005
                                                                                     --------      --------
                                                                                   (Unaudited)
                                     Assets
<S>                                                                                  <C>           <C>
Current Assets:
  Cash and cash equivalents ....................................................     $     --      $     --
  Accounts receivables, net of allowance for doubtful accounts of
   $0 at March 31, 2006 and December 31, 2005 ..................................           62            38
  Inventories ..................................................................           26            26
  Prepaid expenses and other current assets ....................................          124            73
                                                                                     --------      --------
              Total current assets .............................................          212           137
Fixed Assets, net ..............................................................           53           233
Licenses, patents and technology, net of amortization ..........................           20            20
                                                                                     --------      --------
              Total assets .....................................................     $    285      $    390
                                                                                     ========      ========

                      Liabilities and Stockholders' Deficit
Current Liabilities:
  Checks issued in excess of amounts on deposit ................................     $     96      $      5
  Accounts payable .............................................................        3,612         3,714
  Accrued payroll costs ........................................................          598           643
  Accrued expenses .............................................................        2,235         2,292
  Deferred revenue .............................................................           25            25
  Due to stockholder ...........................................................           37            37
  Lease obligation .............................................................           81            96
  Notes payable--related party .................................................           70            70
  Notes payable ................................................................        3,394         3,557
                                                                                     --------      --------
              Total current liabilities ........................................       10,148        10,439
                                                                                     --------      --------

Stockholders' Deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,102,192
     shares issued and outstanding at March 31, 2006 and December 31, 2005
     (Liquidation value of all classes of preferred stock $9,459) ..............        7,716         7,716
Common stock, $0.001 par value; 375,000,000 shares authorized;
     205,425,465 and 154,665,084 shares issued and 205,233,377
     and 154,472,995 shares outstanding at March 31, 2006 and
     December 31, 2005, respectively ...........................................          205           155
Additional paid-in-capital .....................................................       53,704        52,386
Treasury stock; 192,088 shares at March 31, 2006 and December 31, 2005 .........         (327)         (327)
Accumulated deficit ............................................................      (71,093)      (69,911)
Accumulated comprehensive loss--
         Cumulative translation adjustment .....................................          (68)          (68)
                                                                                     --------      --------
              Total stockholders' deficit ......................................       (9,863)      (10,049)
                                                                                     --------      --------
              Total liabilities and stockholders' deficit ......................     $    285      $    390
                                                                                     ========      ========
</TABLE>

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


                                       3
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                                                                     March 31,
                                                                                     ---------
                                                                              2006               2005
                                                                          -------------      -------------
                                                                                    (Unaudited)

<S>                                                                       <C>                <C>
Net revenues ........................................................     $          23      $          40
Operating expenses
         Cost of revenues (impairment charge of property assets).....               169                 --
         Research and development ...................................                66                 72
         Selling, general, and administrative expenses ..............               804                717
                                                                          -------------      -------------
              Total operating expenses ..............................             1,039                789
                                                                          -------------      -------------

Operating loss ......................................................            (1,016)              (749)

Interest expense:
         Interest expense - related party ...........................                (2)                (2)
         Interest expense ...........................................              (164)              (401)
                                                                          -------------      -------------
              Total interest expense ................................              (166)              (403)
                                                                          -------------      -------------
Loss before income taxes ............................................            (1,182)            (1,152)
Income tax expense ..................................................                --                 --
                                                                          -------------      -------------
      Net loss ......................................................            (1,182)            (1,152)

Preferred stock dividend ............................................                --               (225)
                                                                          -------------      -------------
      Total dividends ...............................................                --               (225)
                                                                          -------------      -------------

Net loss applicable to common stockholders ..........................     $      (1,182)     $      (1,377)
                                                                          =============      =============

Basic and diluted net loss per common share .........................     $       (0.01)     $       (0.01)
                                                                          =============      =============

Weighed average number of common shares outstanding .................       163,798,692        104,343,116
                                                                          =============      =============
</TABLE>

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


                                       4
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                             Three Months Ended
                                                                                                 March 31,
                                                                                                 ---------
                                                                                              2006        2005
                                                                                            -------      -------
                                                                                                (Unaudited)
<S>                                                                                         <C>          <C>
Operating Activities:
      Net loss ........................................................................     $(1,182)     $(1,152)
      Adjustments to reconcile net loss to net cash used in operating activities:
         Amortization of debt discount ................................................          14          176
         Depreciation and amortization ................................................          12           34
         Impairment charge of property asset ..........................................         169           --
         Amortization of fees .........................................................          11           34
         Loss on sale of fixed assets .................................................          --            3
         Notes issued in payment of an expense ........................................          48           40
         Warrant related expenses issued in settlement of debt ........................         127          421
         Stock, warrants and options issued to non-employees for services .............          --           16
         Changes in assets and liabilities:
              Accounts receivable .....................................................         (23)          20
              Due from stockholder ....................................................          --           (1)
              Prepaid expenses and other current assets ...............................         (62)           1
              Accounts payable ........................................................        (101)         (69)
              Accrued expenses ........................................................         (43)         (48)
                                                                                            -------      -------
      Net cash used in operating activities ...........................................      (1,030)        (525)
                                                                                            -------      -------

Cash used in investing activities:
      Purchases of fixed assets .......................................................          (1)          --
                                                                                            -------      -------

Cash flows from financing activities:
      Checks issued in excess of amounts on deposit ...................................          92           --
      Net proceeds from issuance of common stock ......................................         952          521
      Lease obligation ................................................................         (13)          --
      Payment of notes payable ........................................................          --           (4)
                                                                                            -------      -------
      Net cash provided by financing activities .......................................       1,031          517
                                                                                            -------      -------
Effect of exchange rate changes on cash and cash equivalents ..........................          --           --
                                                                                            -------      -------

Net increase (decrease) in cash and cash equivalents ..................................           0           (8)

Cash and cash equivalents at the beginning of period ..................................           0           11
                                                                                            -------      -------

Cash and cash equivalents at end of period ............................................     $     0      $     3
                                                                                            =======      =======

Supplemental disclosure of cash flow information:

Cash paid during the period for:
      Interest ........................................................................     $    --      $    25
Non-cash transactions during the period for:
      Financing costs .................................................................     $    --      $    16
      Convertible promissory notes and accrued interest converted
            into common stock .........................................................     $   288      $    --
</TABLE>

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


                                       5
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.        Organization

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

      MDI was incorporated in Delaware in December 1998 as the successor to Bell
National Corporation, a company incorporated in California in 1958. In December
1998, Bell National, which was then a shell corporation without any business
activity, acquired InPath, LLC, a development stage company engaged in the
design and development of products used in screening for cervical and other
types of cancer. For accounting purposes, the acquisition was treated as if
InPath had acquired Bell National. However, Bell National continued as the legal
entity and the registrant for Securities and Exchange Commission filing
purposes. Bell National merged into Ampersand Medical Corporation ("Ampersand"),
its wholly-owned subsidiary, in May 1999 in order to change the state of
incorporation of the company to Delaware.

      In September 2001, the Company acquired 100% of the outstanding stock of
AccuMed International, Inc. ("AccuMed") by means of a merger of AccuMed into a
wholly-owned subsidiary. Shortly after the AccuMed merger, the Company changed
its corporate name to Molecular Diagnostics, Inc. The name change was effected
by the merger of our wholly-owned subsidiary, Molecular Diagnostics, Inc., with
and into Ampersand. Except where the context otherwise requires, "MDI," the
"Company," "we" and "our" refers to Molecular Diagnostics, Inc. and our
subsidiaries and predecessors.

      MDI, in the past, was primarily focused on the design, development and
marketing of its InPath(TM) System and related image analysis systems. The
component products of the InPath System are intended to screen for, at the
earliest possible stage, cancer and cancer-related diseases and may be used in a
laboratory, clinic or doctor's office. We have designed and manufactured the
AcCell(TM) computer-aided automated microscopy instrument and the AcCell
Savant(TM), an instrument that includes an AcCell instrument and software and
which collects quantitative cellular information used in support of a diagnostic
process.

      The Company now is focused on marketing a new, fully-integrated
workstation - the Automated Image Proteomic System or "AIPS(TM)" - based on
updated technology. We expect that the new platform will be marketed through a
distribution partner and, in certain instances, will be placed in a customers'
facility on a fee-for-use basis.

      The Company has incurred significant operating losses since its inception.
Management expects that significant on-going operating expenditures will be
necessary to successfully implement MDI's business plan and develop, manufacture
and market its products. These circumstances raise substantial doubt about MDI's
ability to continue as a going concern. Implementation of the Company's plans
and its ability to continue as a going concern depend upon its securing
substantial additional financing. During the first three months of 2006, MDI
raised net proceeds of $951,500 through the private sale of unregistered,
restricted common stock. Management's plans include efforts to obtain additional
capital, although no assurances can be given about the Company's ability to
obtain such capital. The Company's new management team also is working to
develop a restructuring proposal to provide unsecured creditors a settlement
plan, which is contingent on the Company's ability to raise sufficient new
equity to fund operations. If the Company is unable to obtain adequate
additional financing or generate profitable sales revenues, or negotiate a
favorable settlement plan with creditors, it may be unable to resume its product
development and other activities and may be forced to cease operations. The
consolidated financial statements presented herein do not include any
adjustments that might result from the outcome of this uncertainty. Since March
31, 2006, MDI, as part of its current common stock offering, offered common
stock to accredited investors in exchange for cash. For the two months ended May
31, 2006, the Company received net proceeds of $1,319,000 and was obligated to
issue approximately 19,000,000 shares of unregistered, restricted common stock
in connection with such sales.


                                       6
<PAGE>

Note 2.  Basis of Presentation

      The consolidated financial statements for the periods ended March 31, 2006
and 2005 included herein are unaudited. Such consolidated financial statements
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position and results of operations as of and for the
periods indicated in order to make the financial statements not misleading. All
such adjustments are of a normal recurring nature. These interim results are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2006 or for any other period.

      Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2005, as filed with the SEC.

Note 3.  Summary of Significant Accounting Principles

      The accounting policies and principles management believes are most
critical to aid in understanding and evaluating the Company's reported
consolidated financial results include the following:

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

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

      Revenue Recognition. MDI recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition," when the following criteria
are met: shipment of a product or license to customers has occurred and there
are no remaining Company obligations or contingencies; 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 12 months. Revenue from training
services and professional services is recognized when the service is completed.
Revenue from implementation and installation services is recognized using the
percentage of completion method. Implementation and installation services are
generally completed within 120 days.

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

      Foreign Currency Translation. The functional currency of the Company's
foreign operations is the local currency. Accordingly, all assets and
liabilities are translated into U.S. dollars using year-end exchange rates, and
all revenues and expenses are translated using average exchange rates during the
year. Such amounts relate to the Company's inactive Canadian subsidiary.

      Net Loss Per Share. Basic loss per share is calculated based on the
weighted-average number of outstanding common shares. Shares issued and shares
reacquired during the period are weighted for the portion of the period that
they were outstanding. Diluted loss per share is calculated based on the
weighted-average number of outstanding common shares plus the effect of dilutive
common shares. MDI's calculation of diluted net loss per share as reported
excludes potential common shares, as the effect would be anti-dilutive.


                                       7
<PAGE>

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

      Effect of Contingently Convertible Instruments on Diluted Earnings per
Share. In October 2004, the FASB ratified the consensus reached in Emerging
Issue Task Force (EITF) Issue No. 04-8, "The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share." The EITF reached a consensus that
contingently convertible instruments, such as contingently convertible debt,
contingently convertible preferred stock, and other such securities should be
included in diluted earnings per share (if dilutive) regardless of whether the
market price trigger has been met. The consensus became effective for reporting
periods ending after December 15, 2004. The adoption of this pronouncement did
not have a material effect on the Company's financial statements.

      Accounting Changes and Error Corrections. In May 2005, the FASB issued
SFAS 154 "Accounting Changes and Error Corrections" (SFAS 154). This statement
replaces APB Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements", and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The adoption of
SFAS 154 did not materially impact the Company's consolidated financial
statements.

Note 4.  Licenses, Patents and Technology

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

      At each annual 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 the recoverability of such
assets.

      Licenses, patents, and technology (in thousands) include the following:

                                                    March 31,  December 31,
                                                      2006         2005
                                                    -------       ------
      Licenses.................................     $    20      $    20
      Patent costs.............................         133          133
      LabCorp. technology agreement............         260          260
                                                    -------       ------
      Subtotal.................................         413          413
      Less accumulated amortization............        (393)        (393)
                                                    -------       ------
                       Total...................     $     20      $   20
                                                    ========      ======

Note 5. Accrued Expenses

      Accrued expenses (in thousands) include the following:

                                                         March 31,  December 31,
                                                           2006        2005
                                                         -------      ------
      Accrued interest..............................     $   935      $  898
      Accrued interest--related party...............          37          34
      Accrued settlement costs for legal fees.......         438         438
      Accrued franchise and other taxes.............         589         589
      Other accrued expenses........................         236         333
                                                         -------      ------
              Total.................................      $2,235      $2,292
                                                          ======      ======


                                       8
<PAGE>

      MDI was delinquent in paying a portion of federal and state employee and
employer payroll taxes for the fourth quarter of fiscal 2005. These were paid in
April, 2006.

Note 6.  Notes Payable--Related Parties

      Notes payable to related parties (in thousands except for descriptions)
consist of:

<TABLE>
<CAPTION>
                                                                                                    March 31,   December 31,
                                                                                                      2006         2005
                                                                                                    -------       ------
<S>                                                                                                 <C>           <C>
         Northlea Partners, Ltd., an affiliate of a board member, $25,000 Promissory
            Note issued August 6, 2001;interest rate 15% per annum.............................     $    25       $   25
         Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001;
            interest rate 9% per annum.........................................................          15           15
         Northlea Partners, Ltd., $15,000 Bridge II Convertible Promissory Note issued
            May 1, 2003; interest rate 12% per annum (see description under Bridge II
            Notes in Note 7-Notes Payable for other terms and conditions)......................          15           15
         Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate
            9% per annum.......................................................................          15           15
                                                                                                    -------       ------
                                                                                                    $    70       $   70
                                                                                                    =======       ======
</TABLE>

      Peter Gombrich Amounts Due. Peter Gombrich, the Company's former Chairman
and CEO, was owed $36,481 at March 31, 2006 and December 31, 2005, for both
periods, for previous unsecured non-interest bearing advances to the Company,
which are classified as a liability- "Due to Stockholder" in the accompanying
consolidated balance sheets.

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

Note 7.  Notes Payable

      Notes payable to unrelated parties (in thousands except for descriptions)
consist of:

<TABLE>
<CAPTION>
                                                                                                      March 31,    December 31,
                                                                                                         2006         2005
                                                                                                       -------       ------
<S>                                                                                                     <C>        <C>
         Bridge I Convertible Promissory Notes; due December 31, 2002; interest
            rate 7% per annum; convertible into common stock at 75% of the market price on
            date of conversion; beneficial conversion feature valued at $1,042,000 at June
            30, 2002; warrants at an exercise price of $0.20 per share; additional
            warrants at an exercise price equal to 150% of note conversion price..................     $   300       $  500
         Bridge II Convertible Promissory Notes; due July 31, 2004; interest rate
            12% or 15% per annum; convertible into common stock at $0.10 or $0.15 per share;
            beneficial conversion feature valued at $1,777,000 and $330,000 at December 31,
            2003 and December 31, 2002, respectively;
            warrants at an exercise price of $0.15 or $0.20 per share.............................       1,260        1,285
         Bridge III Convertible Promissory Notes; due December 31, 2008; interest rate 10%
            per annum; convertible into common stock at $0.10 per share; beneficial
            conversion feature valued at $1,604,000 at June 30, 2004; warrants at an
            exercise price of $0.15 per share.....................................................         144          130
         Monsun, AS $500,000 Promissory Note issued November 1, 2000; due July 31,2002;
            interest rate 20% per annum, compounded into principal amount; beneficial
            conversion feature valued at $125,000 at November 1, 2000.............................       1,001          953
         MonoGen, Inc. $305,000 Promissory Note issued October 14, 2004; interest rate at 14%
            per annum; first installment of $25,000 due November 1, 2004 with monthly
            principal and interest installments of $10,000 thereafter; due January 1, 2007........         305          305
         Ungaretti & Harris LLP $211,368 Secured Promissory Note issued May 8, 2003; interest
            rate at 12% per annum; due September 30, 2003.........................................          51           51
         Ernst & Young LLP $30,800 Promissory Note issued July 17, 2003; interest rate at 12%
            per annum commencing January 1, 2003; due December 31, 2003...........................          31           31
         Ventana Medical Systems, Inc. $62,946 Promissory Note issued November 30, 2003;
            due December 31, 2003; interest at 8% per annum payable after December 31, 2003.......          21           21
         Xillix Technologies Corporation $361,000 Promissory Note issued June 26, 1998; interest
            rate Canadian Prime plus 6% per annum; represents a debt of AccuMed...................          34           34
         Western Economic Diversification $221,000 Promissory Note issued June 1989; no
            interest; represents a debt of Oncometrics............................................         247          247
                                                                                                       -------       ------
                                                                                                       $ 3,394       $3,557

</TABLE>


                                       9
<PAGE>

      Bridge I. In 2002, MDI issued an aggregate $3,185,000 in Bridge I
Convertible Promissory Notes to accredited investors. The notes bear interest at
the rate of 7% per annum and are convertible at any time into the common stock
of MDI at a conversion price equal to 75% of the market price of the Company's
common stock on the date of conversion. In addition, MDI issued to each holder a
warrant that entitled each such holder to purchase one share of common stock at
an exercise price of $0.20 per share for each dollar of principal. MDI
calculated a fair value of $99,950 for these warrants using the fair value
interest rate method and recorded this amount as additional interest expense
during 2002. In addition, at the time of conversion of the note, each holder is
entitled to receive a warrant to purchase one share of common stock for each
four shares of common stock into which the note converts at an exercise price
equal to 150% of the conversion price of the note. 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 $1,042,000 at June 30,
2002.

      Management extended a written offer, dated October 10, 2003, to the Bridge
I noteholders to convert their notes and accrued interest into common shares at
a conversion rate of $0.15 per share. In addition, the Bridge I holders were
offered warrants to purchase one new share for every four shares acquired by the
noteholder upon exercise of such holder's conversion rights under the notes.
This offer continued to remain outstanding as of March 31, 2006.

      During the three months ended March 31, 2006, holders of $200,000
principal amount of Bridge I convertible promissory notes elected to convert
their notes and related accrued interest of approximately $55,000 into 1,702,513
shares of unregistered common stock. The remaining $300,000 in principal Bridge
I notes remained unconverted and outstanding at March 31, 2006.

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

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


                                       10
<PAGE>

      For the three months ended March 31, 2006, holders of $25,000 principal
amount of Bridge II convertible promissory notes elected to convert their notes
and related accrued interest of approximately $9,000 into 228,487 shares of
unregistered common stock. The remaining $1,260,000 in principal Bridge II notes
remained unconverted and outstanding at March 31, 2006.

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

      The funds raised by Bathgate were used for repayment of a $1 million
convertible note held by the wife of a related party, payment of taxes, and
working capital. On May 21, 2004, the Company issued an additional $162,500 in
Bridge III notes in exchange for cash. The conversion prices of the notes issued
during 2004 were less than the market price of the common stock when the notes
were issued; therefore, the holders are considered to have a beneficial
conversion feature. MDI determined the value of the beneficial conversion
feature to be $1,604,000 at June 30, 2004. The value was recorded as a reduction
of the debt and will be amortized as additional interest over the life of the
notes. MDI recorded additional interest expense of $13,852 and $266,014 to
reflect amortization of the discount during the three months ended March 31,
2006 and the twelve months ended December 31, 2005, respectively. At the
conclusion of the offering, the Company had issued an aggregate $1,662,500 in
principal amount of Bridge III convertible promissory notes in exchange for
cash. The remaining face value of $302,500 in principal Bridge III notes
remained unconverted and outstanding at March 31, 2006.

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

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


                                       11
<PAGE>

      In January 2003, Monsun initiated a legal action against Peter Gombrich,
MDI's then-Chairman, as a personal guarantor on the note, in an attempt to
collect the unpaid principal balance of the note. Monsun was successful in
obtaining a legal judgment of approximately $675,000 related to the note balance
and accrued interest against Mr. Gombrich as personal guarantor. In addition,
Monsun was granted an award of approximately $438,000 for attorneys' fees
against Peter Gombrich as the personal guarantor. The award for legal fees has
been recorded as an accrued expense. (See Note 5 - Accrued Expenses) Those
judgments remain unsatisfied. Monsun has not filed suit directly against the
Company to recover any amounts due under the note or otherwise.

      In May 2006, Monsun converted its convertible promissory note in the
principal amount of $500,000 and $519,000 of accrued interest into 7,624,327
unregistered shares of the Company's common stock. According to the note
conversion terms, the Company will record in the second quarter of 2006 an
additional interest expense of $1,300,000 on the Monsun note and accrued
interest conversion.

      MonoGen, Inc. In October 2004, MDI entered into a settlement agreement
with MonoGen, Inc. relating to an arbitration proceeding brought against AccuMed
and Oncometrics for alleged breaches in connection with certain license and
related agreements among the parties. As part of the settlement, MDI issued a
promissory note to MonoGen in the amount of $305,000, payable in an initial
installment of $25,000 on November 1, 2004 and monthly installments thereafter
of $10,000 until the note is paid in full, and agreed to transfer to MonoGen
certain assets. Inasmuch as the assets were not timely transferred, and because
the initial $25,000 payment to be made under the note was not paid by its due
date, MonoGen delivered a notice of default to the Company and AccuMed in
November 2004. If the default asserted in the notice is not cured, there are a
number of remedies that may be available to MonoGen under the provisions of the
settlement agreement and the note, one of which is the possibility that the full
principal amount of the note may be accelerated and declared immediately due and
payable. To date, neither MDI nor any related party to the suit has received
further notice in regard to the asserted default, although not all of the
remedies that may be available to MonoGen in regard to such default would
require that further notices be given.

      Ungaretti & Harris LLP. In March 2005, MDI entered into a settlement
agreement related to a judgment entered against the Company and in favor of
Ungaretti & Harris LLP in the law firm's suit against MDI for unpaid legal fees.
In January 2005, the court entered summary judgment in favor of Ungaretti &
Harris in the amount of $195,500, plus costs of suit. The parties subsequently
entered into a settlement agreement in satisfaction of the judgment, whereby MDI
issued a note for $150,000 to the law firm, payable in installments of $25,000
commencing March 22, 2005, and with subsequent payments due in ninety day
increments until paid in full. The parties have since modified the settlement
agreement and as of March 31, 2006, MDI was obligated to make two final
payments, both of which had been made as of June 9, 2006.

      See Note 10 - Legal Proceedings for more information regarding or giving
rise to the Monsun and Ungaretti & Harris notes described above.

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

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

Note 8. Stockholders' Equity

      A summary of the Company's preferred stock capital table is as follows:


                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                                                   March 31,         December 31,
                                                                                     2006                2005
                                                                                     ----                ----
                                                                                Shares Issued &     Shares Issued &
         Offering                                                                 Outstanding         Outstanding
         --------                                                                -------------       -------------
<S>                                                                               <C>                <C>
         Series A convertible..............................................            82,655             82,655
         Series B convertible, 10% cumulative dividend.....................           365,106            365,106
         Series C convertible, 10% cumulative dividend.....................           245,833            245,833
         Series D convertible, 10% cumulative dividend.....................           175,000            175,000
         Series E convertible, 10% cumulative dividend.....................           233,598            233,598
                                                                                  -----------        -----------
Total Preferred Stock......................................................         1,102,192          1,102,192
                                                                                  ===========        ===========
</TABLE>

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

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 and undeclared dividends in arrears at March 31, 2006 were $755,393

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 and undeclared dividends in arrears at March 31, 2006 were $325,259

Series D Convertible Preferred Stock
Liquidation Value:      $10.00 per share
Conversion Price:       $1.00 per share
Conversion Rate:        10.00--Liquidation Value divided by Conversion Price
                        ($10.00/$1.00)
Voting Rights:          None
Dividends:              10%--Quarterly--Commencing April 30, 2002
Conversion Period:      Any time
Cumulative and undeclared dividends in arrears at March 31, 2006 were $772,877

Series E Convertible Preferred Stock
Liquidation Value:      $22.00 per share
Conversion Price:       $0.80 per share
Conversion Rate:        27.50--Liquidation Value divided by Conversion Price
                        ($22.00/$0.80)
Voting Rights:          Equal in all respects to holders of common shares
Dividends:              10%--Quarterly--Commencing May 31, 2002 Conversion
Period:                 Any time
Cumulative and undeclared dividends in arrears at March 31, 2006 were $2,189,594


                                       13
<PAGE>

      Issuance of Common Shares for Cash

      Beginning in the third quarter of 2005, the Company began an offering of
unregistered, restricted common stock to accredited investors in exchange for
cash at between $0.025 and $0.04 per share. These investments are reflected in
Additional Paid-In Capital until such time as such shares are actually issued by
the Company's transfer agent, and will thereafter be reflected in our common
stock register and account. In the first quarter of fiscal 2006, the Company
received net proceeds of $951,500 from the sale of 22,000,000 shares of
unregistered, restricted common stock.

      Issuance of Warrants as a Settlement

      In March 2006, MDI issued warrants to purchase 1,000,000 shares of common
stock with an exercise price of $0.04 per share to a non-employee financial
consultant as a settlement for past consulting services. MDI valued the warrants
at $90,000 using the fair value valuation model and recorded the amount as a
current quarter administrative expense.

      In March 2006, MDI also issued warrants to purchase 300,000 shares of
common stock with an exercise price of $0.10 per share to a former employee as a
settlement for past employment services. MDI valued the warrants at $37,170
using the Black-Scholes valuation model and recorded the amount as a current
quarter payroll expense.

      Exchange of certain Convertible Promissory Notes for Common Shares

      As described in more detail in Note 7, during the first quarter of fiscal
2006, noteholders of certain Bridge I and II Convertible Promissory Notes
elected to exchange an aggregate $225,000 principal and accrued interest for
1,931,001 unregistered shares of the Company's common stock.

      In May 2006, Monsun converted its convertible promissory note in the
principal amount of $500,000 and $519,000 of accrued interest into 7,624,327
unregistered shares of the Company's common stock. According to the note
conversion terms, the Company will record in the second quarter of 2006 an
additional interest expense of $1,300,000 on the Monsun note and accrued
interest conversion.

      As of May 30, 2006, the Company had not issued 928,000 warrants to the
former holders of previously converted Bridge I Convertible Promissory Notes.
The Company plans to issue these warrants to such holders during the second
quarter of 2006. There was no financial impact of these unissued warrants for
the three months ended March 31, 2006.

      Application of Black-Scholes Valuation Model

      In applying the Black-Scholes valuation model, the Company has used an
expected dividend yield of zero; a risk-free interest rate of 5.07% and 4.88%
for the March 31, 2006 and 2005 periods, respectively; volatility factors of
206% and 146%, respectively; and a fair value of the underlying common shares of
the closing market price on the date of the grant. The expected life equaled the
term of the warrants, options, or restricted shares.

Note 9. Equity Incentive Plan and Employee Stock Purchase Plan

      The Company has shareholder-approved stock incentive plans for employees
and directors. Prior to January 1, 2006, the Company accounted for these plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25. "Accounting for Stock Issued to Employees" and related
interpretations, as permitted by Statement of Financial Accounting Standards
("SFAS" or "Statement") No. 123, "Accounting for Stock-Based Compensation".
Effective January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment,"
using the modified prospective transition method. Under the modified prospective
transition method, recognized compensation cost for the three months ended March
31, 2006 includes 1) compensation cost for all share-based payments granted
prior to, but not yet vested as of, December 31, 2005, based on the grant date
fair value estimated in accordance with the original provisions of Statement No.
123; and 2) compensation cost for all share-based payments granted on or after
December 31, 2005, based on the grant date fair value estimated in accordance
with Statement No. 123(R). In accordance with the modified prospective method,
we have not restated prior period results.


                                       14
<PAGE>

      For the three months ended March 31, 2006, the Company did not recognize
any share-based compensation cost and did not capitalize any shared-based
compensation cost. There were no options granted for the three month period
ended March 31, 2005, yet the Company recorded on a pro forma basis
approximately $3,000 for vested options during this period in accordance with
the fair value recognition provisions of SFAS No. 123.

                                        For the three months ended March 31,
                                                                        2005
                                                                        ----
                                     (in thousands except for per share amounts)

Net loss applicable to common shareholders as reported..........     $  (1,377)
  Deduct: Total stock-based compensation determined
    under the fair value based method for all awards and
    forfeitures, net of related taxes...........................            (3)
                                                                     ----------
  Pro forma net loss applicable to common shareholders..........     $  (1,380)
                                                                     ==========

  Basic and diluted loss per share applicable to common
    shareholders - as reported..................................     $   (0.01)
                                                                     ==========
  Basic and diluted loss per share applicable to common
    shareholders - pro forma....................................     $   (0.01)
                                                                     ==========


Note 10. Legal Proceedings

      The Company is a party to a number of legal proceedings which are
described in the Company's Annual Report on Form 10-K. The following cases were
initiated or resolved or had material developments since the date of the
Company's Form 10-K.

      Ungaretti & Harris LLP. In May 2004, the law firm Ungaretti & Harris LLP
filed an amended complaint against MDI in the Circuit Court of Cook County,
Illinois (04 L 1101), to collect fees for services rendered prior to December
31, 2003. In January 2005, the court entered summary judgment in favor of
Ungaretti & Harris and against MDI in the amount of $195,000, plus costs of the
suit. The parties subsequently entered into a settlement agreement to satisfy
the judgment. MDI made the final payment in June 2006. MDI's payments to
Ungaretti & Harris are now concluded and MDI has no further monetary obligation
under the settlement.

      Arthur Lipper III. In July 2004, Arthur Lipper III filed a lawsuit against
MDI in the Circuit Court of Cook County, Illinois (04 L 7671). Mr. Lipper claims
that MDI breached a consulting services agreement and sought $60,000, plus
interest and court costs. MDI entered into a settlement agreement with Mr.
Lipper in February 2006 pursuant to which MDI has agreed to pay Mr. Lipper
$60,000 in full satisfaction of his claims. The lawsuit has been dismissed.
MDI's payments to Mr. Lipper concluded in April 2006 and MDI has no further
monetary obligation under the settlement.

      Boston Healthcare Associates, Inc. In April 2006, former consultants
Boston Healthcare Associates, Inc. demanded payment of $25,000, the second
installment payment required pursuant to a consulting services agreement between
the parties that was cancelled in August 2004. MDI entered into a full release
agreement with Boston Healthcare Associates in May 2006 pursuant to which MDI
has agreed to pay it $25,000 in full satisfaction of all claims. MDI's payment
to Boston Healthcare Associates in May 2006 completed MDI's monetary obligation
to it. MDI has no further monetary obligation to Boston Healthcare Associates,
Inc.

      Tucker Anthony Sutro/RBC Dain Rauscher, Inc. In December 2005, former
financial consultants Tucker Anthony Sutro's successor in interest, RBC Dain
Rauscher, Inc., demanded payment of $30,000 for services Tucker Anthony Sutro
provided to MDI during 2001. MDI entered into a settlement agreement with RBC
Dain Rauscher as Tucker Anthony Sutro's successor in interest. Pursuant to that
agreement and release, MDI paid $10,000 to RBC Dain Rauscher in full
satisfaction of all claims in May 2006. MDI has no further monetary obligation
to Tucker Anthony Sutro or RBC Dain Rauscher, Inc.


                                       15
<PAGE>

Note 11. Impairment of Property Assets

      The Company recorded an impairment charge of $169,000 during the quarter
ended March 31, 2006, related to capitalized design and tooling equipment. The
Company determined that such equipment would not be used in its future
operations.


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

      Forward-Looking Statements

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

      These forward-looking statements are based on beliefs of our management as
well as current expectations, projections and assumptions currently available to
the Company and are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or those anticipated
or implied by such forward-looking statements. These risks are described more
fully in our most recent Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2005, under the caption "Risk Factors", and include our ability to
raise capital; our ability to settle litigation; our ability to retain key
employees; economic conditions; technological advances in the medical field;
demand and market acceptance risks for new and existing products, technologies,
and healthcare services; the impact of competitive products and pricing;
manufacturing capacity; new plant start-ups; U.S. and international regulatory,
trade, and tax policies; product development risks, including technological
difficulties; ability to enforce patents; and foreseeable and unforeseeable
foreign regulatory and commercialization factors.

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

Overview of Molecular Diagnostics, Inc.

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

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


                                       16
<PAGE>

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

      The Company has incurred significant operating losses since its inception.
The Company has raised approximately $38,000,000 from March 1998 through March
31, 2006. 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 the
Company's plans and its ability to continue as a going concern depend upon its
securing substantial additional financing. During the first three months of
2006, MDI raised net proceeds of $951,500 through the private sale of
unregistered, restricted common stock. Management's plans include efforts to
obtain additional capital, although no assurances can be given about the
Company's ability to obtain such capital. The Company's new management team also
is working to develop a restructuring proposal to provide unsecured creditors a
settlement plan, which is contingent on the Company's ability to raise
sufficient new equity to fund operations. If the Company is unable to obtain
adequate additional financing or generate profitable sales revenues, or
negotiate a favorable settlement plan with creditors, it may be unable to resume
its product development and other activities and may be forced to cease
operations. The consolidated financial statements presented herein do not
include any adjustments that might result from the outcome of this uncertainty.
From January 1, 2006 through March 31, 2006, the Company raised $951,500 through
the sale of unregistered, restricted common stock. Since March 31, 2006, MDI, as
part of its current common stock offering, offered common stock to accredited
investors in exchange for cash. For the two months ended May 31, 2006, the
Company received net proceeds of $1,319,000 and was obligated to issue
approximately 19,000,000 shares of unregistered, restricted common stock in
connection with such sales.

Critical Accounting Policies and Changes to Accounting Policies

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

         There have been no material changes in our critical accounting policies
or critical accounting estimates since December 31, 2005, nor have we adopted
any accounting policy that has or will have a material impact on our
consolidated financial statements. For further discussion of our accounting
policies see Note 3 - Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements included in this Quarterly Report on Form
10-QSB, as well as our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2005.

Results of Operations

      The following discussion and analysis should be read in conjunction with
our unaudited consolidated financial statements presented in Part I, Item 1 of
this Quarterly Report and our audited consolidated financial statements and
notes thereto, as well as our Management's Discussion and Analysis, contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2005 as filed
with the SEC.

      Three Months Ended March 31, 2006 as compared to Three Months Ended March
      -------------------------------------------------------------------------
31, 2005
--------

      Revenue

      Revenues for the three months ended March 31, 2006 decreased $17,000, or
43%, to $23,000 from revenues of $40,000 for the same period in 2005. This
decrease was the result of a reduction in revenue from the sale of our
slide-based installed systems.


                                       17
<PAGE>

      Costs and Expenses

      Cost of Revenues

      Cost of revenues is comprised of an impairment charge of $169,000 during
the quarter ended March 31, 2006, related to capitalized design and tooling
equipment. The Company determined that such equipment would not be used in its
future operations. No such charge was made during the comparable quarter of
fiscal 2005.

      Research and Development

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

      For the quarter ended March 31, 2006, our R&D expenses were $66,000, a
decrease of $6,000, or 8%, over R&D expenses of $72,000 during the same period
in 2005 as a result of decreased depreciation expense on a portion of
fully-depreciated laboratory equipment.

      Selling, General and Administrative

      For the quarter ended March 31, 2006, selling, general and administrative
expenses ("SG&A") were $804,000, an increase of $87,000, or 12%, over expenses
of $717,000 for the same period in 2005. This increase included increases in our
legal and outside consulting costs, offset by a decrease in financing costs and
administrative payroll expenses.

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

      Interest Expense

      Interest expense, including interest expense to related parties, decreased
$237,000 for the first quarter ended March 31, 2006 to $166,000, a decrease of
59% over interest expense of $403,000 during the same period of 2005. The
decrease resulted from noteholder conversions during the third and fourth
quarters of fiscal 2005 and the first quarter of fiscal 2006 in Bridge I, II,
III and IV convertible promissory notes. The prior year conversions of Bridge
III and IV convertible promissory notes substantially reduced the remaining
unamortized debt discount remaining as of March 31, 2006.

      Net Loss

      The net loss for the three-month period ended March 31, 2006 before
preferred dividends totaled $1,182,000, compared with $1,152,000 for the same
period in 2005, an increase of $30,000 or 3%. The increase resulted from an
increase in cost of revenues and SG&A expenses, offset by decreases in interest
and R&D expenses. In addition, cumulative dividends on the Company's outstanding
Series B, Series C, Series D and Series E convertible preferred stock totaled
zero for the quarter ended March 31, 2006, compared with $225,000 for the same
period in 2005. The net loss applicable to common stockholders for the three
months ended March 31, 2006 was $1,182,000, or $0.01 per share, on 163,600,135
weighted average common shares outstanding. This compared with the net loss
applicable to common stockholders for the three-month period ended March 31,
2005 of $1,377,000, or $0.01 per share, on 104,343,116 weighted average common
shares outstanding.


                                       18
<PAGE>

Liquidity and Capital Resources

      Research and development, clinical trials and other studies of the
components of our InPath System, conversions from designs and prototypes into
product manufacturing, initial sales and marketing efforts, medical consultants
and advisors, and research, administrative, and executive personnel are and will
continue to be the principal basis for our cash requirements. We have provided
operating funds for the business since its inception through private offerings
of debt and equity to limited numbers of U.S. and foreign accredited investors.
We will be required to make additional offerings in the future to support the
operations of the business until some or all of our products are introduced into
the market. We used $1,030,000 and $525,000 for the first quarter ended March
31, 2006 and 2005, respectively, in operating activities.

      We experienced severe liquidity problems during the quarter ended March
31, 2006. As a result, we were forced to continue our operations at a minimum
level. Officers refrained from drawing salaries during portions of the first
quarter of 2006 and 2005 in order to reduce demands on our limited cash
position. We were able to raise funds through the sale of common stock during
the quarter, although the proceeds of the common stock offerings were used to
satisfy certain obligations coming due at that time as well as for the payment
of a limited amount of current operational expenses.

      At March 31, 2006 and December 31, 2005, we had zero cash on hand. This
cash position results from our loss from operations and our inability to raise
sufficient new capital due to very unfavorable conditions in financing markets,
both public and private, for companies in general, and especially for small life
sciences companies such as ours. We were unable to raise sufficient funds during
the quarter to maintain adequate cash reserves and to meet the ongoing
operational needs of the business.

      We incurred $1,400 of capital expenditures for computer equipment during
the first quarter of fiscal 2006 and no capital expenditures during the same
period of 2005. 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. MDI is striving to keep capital expenditures to a minimum due to capital
and liquidity constraints, and the Company has no plans for material commitments
for capital expenditures in the near-term.

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

Off-Balance Sheet Arrangements

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

Item 3.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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


                                       19
<PAGE>

Changes in Internal Control over Financial Reporting

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

Part II. Other Information

Item 1.  Legal Proceedings

      The Company is a party to a number of legal proceedings which are
described in the Company's Annual Report on Form 10-K. The following cases were
initiated or resolved or had material developments since the date of the
Company's Form 10-K.

      Ungaretti & Harris LLP. In May 2004, the law firm Ungaretti & Harris LLP
filed an amended complaint against MDI in the Circuit Court of Cook County,
Illinois (04 L 1101), to collect fees for services rendered prior to December
31, 2003. In January 2005, the court entered summary judgment in favor of
Ungaretti & Harris and against MDI in the amount of $195,000, plus costs of the
suit. The parties subsequently entered into a settlement agreement to satisfy
the judgment. MDI made the final payment in June 2006. MDI's payments to
Ungaretti & Harris are now concluded and MDI has no further monetary obligation
under the settlement.

      Arthur Lipper III. In July 2004, Arthur Lipper III filed a lawsuit against
MDI in the Circuit Court of Cook County, Illinois (04 L 7671). Mr. Lipper claims
that MDI breached a consulting services agreement and sought $60,000, plus
interest and court costs. MDI entered into a settlement agreement with Mr.
Lipper in February 2006 pursuant to which MDI has agreed to pay Mr. Lipper
$60,000 in full satisfaction of his claims. The lawsuit has been dismissed.
MDI's payments to Mr. Lipper concluded in April 2006 and MDI has no further
monetary obligation under the settlement.

      Boston Healthcare Associates, Inc. In April 2006, former consultants
Boston Healthcare Associates, Inc. demanded payment of $25,000, the second
installment payment required pursuant to a consulting services agreement between
the parties that was cancelled in August 2004. MDI entered into a full release
agreement with Boston Healthcare Associates in May 2006 pursuant to which MDI
has agreed to pay it $25,000 in full satisfaction of all claims. MDI's payment
to Boston Healthcare Associates in May 2006 completed MDI's monetary obligation
to it. MDI has no further monetary obligation to Boston Healthcare Associates,
Inc.

      Tucker Anthony Sutro/RBC Dain Rauscher, Inc. In December 2005, former
financial consultants Tucker Anthony Sutro's successor in interest, RBC Dain
Rauscher, Inc., demanded payment of $30,000 for services Tucker Anthony Sutro
provided to MDI during 2001. MDI entered into a settlement agreement with RBC
Dain Rauscher as Tucker Anthony Sutro's successor in interest. Pursuant to that
agreement and release, MDI paid $10,000 to RBC Dain Rauscher in full
satisfaction of all claims in May 2006. MDI has no further monetary obligation
to Tucker Anthony Sutro or RBC Dain Rauscher, Inc.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

      Common Stock. Beginning in the third quarter of 2005, the Company began an
offering of unregistered, restricted common stock to accredited investors in
exchange for cash at between $0.025 and $0.12 per share. These investments are
reflected in Additional Paid-In Capital until such time as such shares are
actually issued by the Company's transfer agent and will thereafter be reflected
in our common stock register and account. In the first quarter of fiscal 2006,
the Company received net proceeds of $951,500 from the sale of 22,000,000 shares
of unregistered, restricted common stock.

      Warrants. In March 2006, MDI issued warrants to purchase 1,000,000 shares
of common stock with an exercise price of $0.04 per share to a non-employee
financial consultant as a settlement for past consulting services. MDI valued
the warrants at $90,000 using the fair value valuation model and recorded the
amount as a current quarter administrative expense.


                                       20
<PAGE>

      In March 2006, MDI also issued warrants to purchase 300,000 shares of
common stock with an exercise price of $0.10 per share to a former employee as a
settlement for past employment services. MDI valued the warrants at $37,000
using the Black-Scholes valuation model and recorded the amount as a current
quarter payroll expense.

      Exchange of certain Convertible Promissory Notes for Common Shares. As
described in more detail in Note 7, during the first quarter of fiscal 2006,
noteholders of certain Bridge I and II Convertible Promissory Notes elected to
exchange an aggregate $225,000 principal and accrued interest for 1,931,001
unregistered shares of the Company's common stock. In May 2006, Monsun converted
its convertible promissory note in the principal amount of $500,000 and $519,000
of accrued interest into 7,624,327 unregistered shares of the Company's common
stock. According to the note conversion terms, the Company will record in the
second quarter of 2006 an additional interest expense of $1,300,000 on the
Monsun note and accrued interest conversion

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

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

Company Repurchases of Securities

      During the first quarter of fiscal 2006, neither the Company nor any
affiliated purchaser of the Company purchased equity securities of MDI.

Item 3.  Defaults upon Senior Securities

      As of March 31, 2006, MDI had failed to make the required principal and
interest payments, constituting events of default, on the following notes
payable:

      o     $300,000 in Bridge I convertible promissory notes;
      o     $1,265,000 in Bridge II convertible promissory notes;
      o     $1,001,000 Monsun AS convertible promissory note;
      o     $51,000 Ungaretti & Harris LLP secured promissory note;
      o     $31,000 Ernst & Young LLP promissory note;
      o     $305,000 MonoGen, Inc. promissory note and;
      o     $21,000 Ventana Medical Systems, Inc. promissory note

      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 (which is no longer
outstanding), the MonoGen note payable, and the note payable to Ungaretti &
Harris, MDI has not received any written declarations of default from holders of
outstanding notes payable.


                                       21
<PAGE>

Item 4.  Submission of Matters to Vote of Security Holders

         None

Item 5.  Other Information

         None

Item 6.  Exhibits

         See Exhibit Index


                                       22
<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/ David Weissberg, M.D.
                                       -----------------------------------------
                                           David Weissberg, M.D.
                                           Chairman and Chief Executive Officer

                                       /s/ Robert F. McCullough, Jr.
                                       -----------------------------------------
                                           Robert F. McCullough, Jr.
                                           Chief Financial Officer

Date: June 9, 2006


                                       23
<PAGE>

                                  EXHIBIT INDEX



Exhibit
Number                     Description

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.


                                       24