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 June 30, 2005

|_|   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 |_|

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 AUGUST 10, 2005: 111,458,537
                                                    -----------


<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  --  June  30,  2005
               (unaudited) and December 31, 2004 ............................  3

         b)    Consolidated Statements of Operations -- Three and
               six months  ended June 30,  2005 and June 30, 2004
               (all unaudited) ..............................................  4

         c)    Consolidated  Statements  of  Cash  Flows  --  Six
               months  ended June 30, 2005 and June 30, 2004 (all
               unaudited) ...................................................  5

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

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

Item 3.  Controls and Procedures ............................................ 23

PART II. -- OTHER INFORMATION

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

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds ........ 23

Item 3.  Defaults upon Senior Securities .................................... 24

Item 4.  Submission of Matters to a Vote of Security Holders ................ 28

Item 5.  Other Information .................................................. 28

Item 6.  Exhibits ........................................................... 28

SIGNATURES .................................................................. 29

EXHIBIT INDEX ............................................................... 30


                                       2
<PAGE>

PART I. -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                              MOLECULAR DIAGNOSTICS, INC.
                                              CONSOLIDATED BALANCE SHEETS
                                                 (DOLLARS IN THOUSANDS)

                                                                                                JUNE 30,      DECEMBER 31,
                                                                                                  2005            2004
                                                                                                ---------      --------
<S>                                                                                            <C>            <C>
                                                                                               (Unaudited)
                                                         ASSETS
Current Assets:
Cash and cash equivalents...................................................................    $       1      $     11
Accounts receivables, net of allowance for doubtful accounts of $0 at June 30,
         2005 and December 31, 2004.........................................................           19            30
Inventories   ..............................................................................           48            48
Prepaid financings costs....................................................................           11            80
Prepaid expenses and other current assets...................................................           13            14
                                                                                                ---------      --------
              Total current assets..........................................................           92           183
Fixed Assets, net...........................................................................          264           326
Other Assets:
Licenses, patents and technology, net of amortization.......................................           20            20
                                                                                                ---------      --------
              Total assets..................................................................    $     376      $    529
                                                                                                =========      ========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable............................................................................    $   4,512      $  4,426
Accrued payroll costs.......................................................................        1,048         1,084
Accrued expenses............................................................................        2,193         1,944
Deferred revenue............................................................................           25            25
Due to stockholder..........................................................................           36            38
Lease obligation............................................................................          110           110
Notes payable--related party................................................................           70            70
Notes payable ..............................................................................        5,380         4,955
                                                                                                ---------      --------
              Total current liabilities.....................................................       13,374        12,652
                                                                                                ---------      --------

Stockholders' Equity (Deficit):
Preferred  stock,  $0.001 par value;  10,000,000  shares  authorized;  1,119,192
     shares  issued and  outstanding  at June 30,  2005 and  December  31,  2004
     (Liquidation value of all
classes of preferred stock $9,510,022)......................................................        7,767         7,767
Common stock, $0.001 par value; 300,000,000 shares authorized; 111,650,625 and 99,792,292 shares
issued and 111,458,537 and 99,600,204 shares outstanding at June 30, 2005 and December 31,
2004, respectively..........................................................................          112           100
Additional paid-in-capital..................................................................       47,013        45,961
Treasury stock: 192,088 shares at June 30, 2005 and December 31, 2004.......................         (327)         (327)
Accumulated deficit.........................................................................      (67,508)      (65,565)
Accumulated comprehensive loss--
         Cumulative translation adjustment..................................................          (55)          (59)
                                                                                                ---------      --------
              Total stockholders' equity (deficit)..........................................      (12,998)      (12,123)
                                                                                                ---------      --------
              Total liabilities and stockholders' equity (deficit)..........................    $     376      $    529
                                                                                                =========      ========

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


                                                           3
<PAGE>

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

                                                                  FOR THE SIX MONTHS             FOR THE THREE MONTHS
                                                                     ENDED JUNE 30,                ENDED JUNE 30,
                                                             ----------------------------   ----------------------------
                                                                  2005            2004           2005           2004
                                                             -------------   ------------   -------------   ------------
<S>                                                          <C>             <C>            <C>             <C>
                                                                       (Unaudited)                   (Unaudited)

Net revenues..............................................   $          69   $        154   $          29   $        101
Operating expenses
Cost of revenues..........................................              --             25              --             25
Research and development..................................              97            485              25            328
Selling, general, and administrative expenses.............           1,101          2,138             384            884
                                                             -------------   ------------   -------------   ------------
         Total operating expenses.........................           1,198          2,648             409          1,237
                                                             -------------   ------------   -------------   ------------
Operating loss............................................          (1,129)        (2,494)           (380)        (1,136)

Other income (expense):
Interest expense -related party...........................              (5)           (48)             (3)            (8)
Interest expense .........................................            (809)        (1,137)           (408)          (477)
Other, net    ............................................              --             10              --             --
                                                             -------------   ------------   -------------   ------------
         Total other income (expense).....................            (814)        (1,175)           (411)          (485)
                                                             -------------   ------------   -------------   ------------
Loss before income taxes..................................          (1,943)        (3,669)           (791)        (1,621)
Income tax expense........................................              --             --              --             --
                                                             -------------   ------------   -------------   ------------
 Net loss     ............................................          (1,943)        (3,669)           (791)        (1,621)

Preferred stock dividend..................................            (453)          (570)           (228)          (258)
                                                             -------------   ------------   -------------   ------------
Net loss applicable to common stockholders................   $      (2,396)  $     (4,239)  $      (1,019)  $     (1,879)
                                                             =============   ============   =============   ============

Basic and fully diluted net loss per common share.........   $       (0.02)  $   (0.07)     $       (0.01)  $      (0.03)
                                                             =============   ============   =============   ============
Weighted average number of common shares outstanding......     107,330,150     64,826,113     111,463,812     73,839,577
                                                             =============   ============   =============   ============


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


                                                           4
<PAGE>

<TABLE>
<CAPTION>
                                        MOLECULAR DIAGNOSTICS, INC.
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (DOLLARS IN THOUSANDS)
                                                                                       SIX MONTHS ENDED
                                                                                            JUNE 30,
                                                                                     ---------------------
                                                                                       2005        2004
                                                                                     ---------   ---------
<S>                                                                                  <C>         <C>
                                                                                          (Unaudited)
Operating Activities:
 Net loss.........................................................................   $  (1,943)  $  (3,669)
Adjustments to reconcile net loss to net cash used for operating activities:
         Amortization of debt discount............................................         353         712
         Depreciation and amortization............................................          68         348
         Amortization of prepaid consulting fees..................................          68         238
         (Gain) loss on sale of fixed assets......................................           3         (99)
         Note issued in payment of an expense.....................................          82          67
         Warrants issued in settlement............................................         421          --
         Return of fixed assets in exchange for relief of indebtedness............          --         149
         Stocks, warrants and options issued to non-employees for services........          --         920
         Changes in assets and liabilities:
              Accounts receivable, net............................................          11          (5)
              Inventories.........................................................          --          19
              Due to stockholder..................................................          (1)        (15)
              Prepaid expenses and other current assets...........................           1          --
              Checks issued in excess of amounts on deposit.......................          --          (5)
              Accounts payable....................................................          86      (1,020)
              Lease obligation....................................................          --        (183)
              Deferred revenue....................................................                     (50)
              Accrued expenses....................................................         213        (186)
                                                                                     ---------   ---------
Net cash used for operating activities............................................        (638)     (2,779)
                                                                                     ---------   ---------
Investing Activities:
Expenditures in licenses, patents and technology..................................          --         (20)
Purchases of fixed assets.........................................................         (10)       (178)
                                                                                     ---------   ---------
Net cash used for investing activities............................................         (10)       (198)
                                                                                     ---------   ---------
Financing Activities:
Proceeds from issuance of convertible notes payable...............................          --       4,236
Net proceeds from issuance of common stock........................................         643          --
Payment of notes payable..........................................................          (5)       (877)
Proceeds from sale of fixed assets................................................          --          28
                                                                                     ---------   ---------
Net cash provided by financing activities.........................................         638       3,387
                                                                                     ---------   ---------
Effect of exchange rate changes on cash and cash equivalents......................          --          --
                                                                                     ---------   ---------
Net increase (decrease) in cash and cash equivalents..............................         (10)        410

Cash and cash equivalents at the beginning of period..............................          11          --
                                                                                     ---------   ---------
Cash and cash equivalents at end of period........................................   $       1   $     410
                                                                                     =========   =========

Supplemental  disclosure of cash flow  information:  Cash paid during the period
for:
 Interest.........................................................................   $      25   $     135
Non-cash transactions during the period for:
Financing costs...................................................................   $      42   $     920
Return of fixed assets in exchange for relief of indebtedness.....................   $      --   $     149
Preferred stock and cumulative dividends converted into common stock..............   $      --   $   6,347


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


                                                    5
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION

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

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

         MDI is a  bio-molecular  diagnostics  company  focused  on the  design,
development and commercialization of cost-effective  screening systems to assist
in the early  detection of cancer,  including its InPath(TM)  System and related
image analysis  systems.  MDI, however,  has currently  curtailed its operations
with respect to the design,  development and marketing of its InPath(TM)  System
and related image analysis  systems,  and expects to resume such operations only
when the Company has obtained additional capital.  The InPath System and related
products are intended to detect cancer and cancer-related  diseases,  and may be
used in a laboratory, clinic, or doctor's office.

         In addition to AccuMed and  Oncometrics  Imaging  Corp., a wholly-owned
subsidiary  of  AccuMed,   MDI  had  another  wholly-owned   subsidiary,   Samba
Technologies,  Sarl  ("Samba").  MDI lost all  rights and title to the assets of
Samba upon completion of the former subsidiary's  bankruptcy liquidation sale in
December 2003.

         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 six months of 2005,
MDI  raised net  proceeds  of  $643,050  through  the sale of its common  stock.
Management's plans for the remainder of fiscal 2005 include  substantial efforts
to obtain additional  capital.  During the quarter ended June 30, 2005, however,
the Company was unable to obtain adequate financing or generate profitable sales
revenues,   and  was  forced  to  curtail  its  product  development  and  other
activities.  If the Company continues to be unable to obtain adequate financing,
it will be forced to cease operations and may seek bankruptcy protection.

NOTE 2.  BASIS OF PRESENTATION

         The  consolidated  financial  statements for the periods ended June 30,
2005 and 2004 included herein are unaudited.  Such 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
and 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, 2005 or for any other period.

         Certain  information  and  footnote  disclosures  normally  included in
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 financial
statements should be read in conjunction with the audited  financial  statements
and the notes  thereto  included  in our  Annual  Report on Form  10-KSB for the
fiscal year ended December 31, 2004, as filed with the SEC.


                                       6
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 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  period-end  exchange rates,
and all revenues and expenses are translated using average exchange rates during
the year.

         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.

         Restructuring   Settlements.   Restructuring  settlements  reflect  the
difference  between the actual  settlement  amounts for various  litigation  and
creditor  payment matters and the amounts  originally  recorded on the Company's
financial statement as the amount due. Settlement amounts were less than amounts
originally recorded in recognition of the Company's financial condition.

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


                                       7
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                   NOTES TO 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 were as follows:
                  (in thousands)

                                                         JUNE 30,   DECEMBER 31,
                                                            2005       2004
                                                         ---------   ---------
                                                        (unaudited)

 Licenses.............................................   $      20   $      20
Patent costs..........................................         133         133
LabCorp Technology Agreement..........................         260         260
                                                         ---------   ---------
 Subtotal.............................................         413         413
Less accumulated amortization.........................        (393)       (393)
                                                         ---------   ---------
                 Total................................   $      20   $      20
                                                         =========   =========

         In  2004,  MDI was  party  to a legal  settlement  with  MonoGen,  Inc.
involving  technology  owned by  MDI's  subsidiary,  AccuMed.  The  dispute  was
resolved,  resulting in the transfer to MonoGen of all of MDI's rights and title
to certain AccuMed intellectual property. The transferred technology is not used
in the Company's  InPath(TM)  cervical screening system. The settlement resulted
in a net  $5,919,000  loss  reflected  in  adjustments  to  the  MDI  Technology
Agreement and accumulated amortization balances as of December 31, 2004.

         In 2004, MDI was also party to a legal  settlement with Invirion,  Inc.
and Dr. Bruce Patterson over the validity of a technology  license.  Pursuant to
the settlement agreement,  MDI agreed to the cancellation of the license,  which
resulted in a net  $569,000  loss  reflected in  adjustments  to the license and
accumulated amortization balances as of December 31, 2004.

For the six months ended June 30, 2005 and 2004, amortization expense was $0 and
$263,000, respectively.

NOTE 5.ACCRUED EXPENSES

         Accrued expenses included the following:
         (in thousands)
                                                         JUNE 30,   DECEMBER 31,
                                                            2005        2004
                                                         ---------   ---------
                                                        (unaudited)

         Accrued interest.............................   $   1,238   $     994
         Accrued interest--related party..............          30          25
         Accrued settlement costs.....................         438         438
         Accrued franchise and other taxes............         476         476
         Other accrued expenses.......................          11          11
                                                         ---------   ---------
                 Total................................   $   2,193   $   1,944
                                                         =========   =========

         MDI was  delinquent  in  paying a  portion  of its  federal  and  state
employee and employer  payroll taxes for 2003,  2002,  and 2001.  The delinquent
federal payroll taxes relating to 2003 and 2002 were paid in full in April 2004.
The  delinquent  federal and state payroll  taxes  relating to 2001 were paid in
full during the six months ended June 30, 2005.

         The Company  owed $0 and $97,000 as of June 30, 2005 and  December  31,
2004, respectively,  for 2001 federal payroll taxes, which amounts for 2004 were
included in accrued payroll costs in the accompanying  December 31, 2004 balance
sheet.


                                       8
<PAGE>

         MDI is also  delinquent in filing certain  federal and state income tax
returns for 2003 and 2002 and is working to complete and file the  returns.  MDI
does not expect to owe federal  and state  income  taxes for 2003 and 2002.  The
delinquent  federal  and state  income tax  returns for 2001 were filed in March
2005 with zero tax due.

NOTE 6.  NOTES PAYABLE--RELATED PARTIES

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

                                                         JUNE 30,   DECEMBER 31,
                                                           2005         2004
                                                         ---------   ---------
                                                        (unaudited)

       Northlea Partners, Ltd., $25,000 Promissory
         Note issued August 6, 2001; interest rate 15%
         per annum.......................................$      25   $      25
       Northlea Partners, Ltd., $15,000 Promissory
         Note issued September 20, 2001; interest rate
         9% per annum....................................       15          15
         Northlea Partners, Ltd., $15,000 Bridge II
       Convertible Promissory Note issued May 1, 2003;
         interest rate 12% per annum (see description
         under Bridge II Notes in Note 7-Notes Payable
         for other terms and conditions).................       15          15
       Robert Shaw, $25,000 Promissory Note issued
         September 20, 2001; interest rate 9% per annum..       15          15
                                                         ---------   ---------
                                                         $      70   $      70
                                                         =========   =========

         Peter  Gombrich  Amounts Due.  Peter  Gombrich,  the  Company's  former
Chairman and CEO, was owed $36,481 and $37,299 at June 30, 2005 and December 31,
2004, respectively, for previous advances to the Company. MDI has classified the
amount  due to Mr.  Gombrich  under  the  current  liabilities  heading  "Due to
stockholder" in the accompanying balance 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,  the possible  conversion of amounts due into stock of the
Company, and the Company's current financial condition.


NOTE 7.  NOTES PAYABLE

         Notes payable to unrelated parties consisted of:
         (in thousands)
                                                         JUNE 30,   DECEMBER 31,
                                                            2005       2004
                                                         ---------   ---------
                                                        (unaudited)

       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 $0.25
         per share; additional warrants at an exercise
         price equal to 150% of note conversion price....$     750   $     750
       Bridge II Convertible Promissory Notes; due
         July 31, 2004; interest rate 12%/15% per annum;
         convertible  into common  stock at $0.10 or
         $0.15 per share; beneficial  conversion feature
         valued at $1,777,000 and $330,000 at December 31,
         2003 and December 31, 2002, respectively;
         warrants at an exercise price of $0.15 or
         $0.20 per share.................................    1,285       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...............      435         268


                                       9
<PAGE>

       Bridge IV Convertible Promissory Notes; due
         December 31, 2008; interest rate 10% per  annum;
         convertible  into  common  stock at  $0.10  per
         share;  beneficial conversion feature valued at
         $1,791,000 at June 30, 2004; warrants at an
         exercise price of $0.15 per share...............    1,271       1,085
       Monsun, AS $500,000 Promissory Note issued
         November 1, 2000; interest rate 20% per annum,
         compounded into principal amount; beneficial
         conversion feature valued at $125,000 at
         November 1, 2000................................      864         782
       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
       O.P., LLC $29,390 Promissory Note issued May 12,
         2003; interest rate at 7% per annum; monthly
         principal payments of $1,316 plus interest
         commencing June 1, 2003; due April 2005.........        1           6
       Ungaretti and Harris LLP $211,368 Secured
         Promissory Note issued May 8, 2003; interest
         rate at 12% per annum; due September 30, 2003...      149         149
       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................      234         239
                                                         ---------   ---------
                                                         $   5,380   $   4,955
                                                         =========   =========

         Bridge I. In 2002,  MDI  issued  an  aggregate  $3,185,000  in Bridge I
Convertible Promissory Notes to accredited investors. The notes bear interest at
the rate of 7% per annum and are  convertible  at any time into the common stock
of MDI at a conversion  price equal to 75% of the market price of the  Company's
common stock on the date of conversion. In addition, MDI issued to each holder a
warrant that  entitled each such holder to purchase one share of common stock at
an  exercise  price  of $0.25  per  share  for each  dollar  of  principal.  MDI
calculated  a fair  value of  $99,950  for these  warrants  using the fair value
interest  rate method and recorded this amount as  additional  interest  expense
during 2002. In addition,  at the time of conversion of the note, each holder is
entitled  to receive a warrant to  purchase  one share of common  stock for each
four shares of common  stock into which the note  converts at an exercise  price
equal to 150% of the  conversion  price of the note.  MDI has not  determined  a
value for these warrants as of June 30, 2005.  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.

         In February  2003, a note holder,  NeoMed  Innovations  III,  converted
$1,060,000  in  principal  amount of  Bridge I notes  into  Bridge II notes.  In
November 2003, two Bridge I note holders  converted  $50,000 in principal amount
of notes and $5,287 in accrued  interest  into  368,579  shares of  unregistered
common stock.  Management  extended a written offer,  dated October 10, 2003, to
the Bridge I noteholders to convert their notes and accrued interest into common
shares at a  conversion  rate of $0.15 per  share.  In  addition,  the  Bridge I
holders  were  offered  warrants to purchase one new share for every four shares
acquired by the  noteholder  upon  exercise of such holder's  conversion  rights
under the notes. This offer continued to remain outstanding as of June 30, 2005.

         During the twelve months ended December 31, 2004, holders of $1,325,000
principal  amount of Bridge I  Convertible  Promissory  Notes elected to convert
their  notes  and  related  accrued  interest  of  approximately  $173,000  into
9,985,182  shares of  unregistered  common  stock.  The  remaining  $750,000  in
principal Bridge I notes remained unconverted and outstanding at June 30, 2005.

         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 as  originally  issued  provide  for  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


                                       10
<PAGE>

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.
MDI recorded additional interest expense of $334,909 to reflect  amortization of
the discount during the twelve months ended December 31, 2004, which represented
the final amortization of the beneficial conversion feature.

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

         For the 12 months  ended  December  31,  2004,  holders of an aggregate
$2,146,000 in principal amount of Bridge II Convertible Promissory Notes elected
to convert their notes and related accrued  interest of  approximately  $251,000
into  17,619,242  shares of  unregistered  common  stock.  Included in the above
conversion  amounts are  amounts due Peter P.  Gombrich,  the  Company's  former
Chairman,  of $305,667 in Bridge II  principal  and $11,431 in accrued  interest
thereon, which were converted into an aggregate 2,113,987 shares of unregistered
common stock.  The remaining  $1,300,000 in principal  Bridge II notes  remained
unconverted and outstanding at June 30, 2005.

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

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

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

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

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

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

With the exception of the conversion of Suzanne Gombrich's  $190,000 note, which
was  converted  following  stockholder  approval of an increase in the number of
authorized   shares  of  common  stock  of  the  Company  in  July  2004,  these
requirements  were satisfied on April 2, 2004 and the Company issued  $1,500,000
in  convertible  promissory  notes in exchange for cash. The funds were used for
repayment of a $1 million convertible note held by Suzanne Gombrich,  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


                                       11
<PAGE>

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 $167,799 and
$208,595 to reflect  amortization of the discount during the 6 months ended June
30,  2005 and the 12  months  ended  December  31,  2004,  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, all of which remained unconverted and outstanding at June 30, 2005.

         Bridge IV. Beginning in February 2004, MDI began a separate offering of
Bridge IV Convertible  Promissory Notes to accredited investors.  The notes bear
interest at 10% per annum payable,  on a semi-annual  basis, in kind in the form
of  shares  of  common  stock  for the  first two years and then in cash for the
remaining  three  years until the  December  31, 2008  maturity  date.  The note
conversion  price and the value of common  shares  paid in kind as  interest  is
$0.10 per share.  The conversion  prices of the notes 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  $1,791,000  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 $185,416 and $302,288 to reflect  amortization of the discount during
the 6 months  ended June 30, 2005 and the 12 months  ended  December  31,  2004,
respectively.

         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.
At the  conclusion  of  the  offering,  the  Company  had  issued  an  aggregate
$2,573,500  in principal  amount of Bridge IV  convertible  promissory  notes in
exchange for cash, all of which remained unconverted and outstanding at June 30,
2005.

         Monsun.  On November 1, 2000, MDI issued a convertible  promissory note
to Monsun,  AS  ("Monsun")  in exchange  for  $500,000  in cash.  The note bears
interest at the rate of 15% per year and was  originally  due 12 months from the
date of issue.  The note is  convertible  into common stock,  any time after the
expiration  of the first 180 days of the loan  term,  at a  conversion  price of
$1.00 per share.

         On October 31,  2001,  Monsun and MDI agreed to the first  extension of
the maturity date of the note until January 31, 2002. As  consideration  for the
first extension agreement,  MDI issued a three-year warrant to Monsun, entitling
the holder to  purchase  100,000  shares of common  stock of MDI at an  exercise
price of $0.60 per share.  On  January  31,  2002,  Monsun and MDI agreed to the
second  extension of the maturity  date of the note.  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  and  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 and adjusted  the interest  rate on
unpaid  principal  to 20% per annum.  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.

         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.


                                       12
<PAGE>

         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 and Harris LLP. In March 2005,  MDI entered into a settlement
agreement  related to a judgment  entered  against  the  Company and in favor of
Ungaretti  and Harris LLP in the law firm's suit  against  MDI for unpaid  legal
fees.  In January  2005,  the court had  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  promised to pay  $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 the balance is paid in full. The Company is
currently in default on the June 21, 2005 payment due and is in discussions with
Ungaretti and Harris.

         See Note 11 - Legal  Proceedings  for more  information  regarding  the
legal  proceedings  regarding or giving rise to the above Monsun,  Ungaretti and
Harris, and MonoGen notes.

         Defaults.  The  Company is in breach of a  significant  majority of its
outstanding  notes  payable  primarily  due to the  Company's  failure  to  make
principal payments when due. In certain cases, the notes payable require that in
order for  certain  types of events of default to occur,  the holder must 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  existing or future  event of default if, or when,
the  holder  provides  the  required  written  notice.  Other  than  the  Monsun
convertible  promissory note, the MonoGen note payable,  and the note payable to
Ungaretti and Harris,  which are the subject of legal actions  described in Note
11 - Legal Proceedings  (certain of which have been settled or are in settlement
discussions as discussed herein),  MDI has not received any written declarations
of default from holders of its outstanding  notes payable,  although  several of
such  notes do not  require  written  notice  of  default.  For a more  detailed
discussion  of the  terms and  conditions  of  certain  of the  Company's  notes
payable, see Item 3 in Part II of this Quarterly Report on Form 10-QSB.

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

NOTE 8.  STOCKHOLDERS' EQUITY

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

<TABLE>
<CAPTION>
                                                          JUNE 30,         DECEMBER 31,
                                                           2005               2004
                                                       -------------    ----------------
<S>                                                    <C>              <C>
                                                       SHARES ISSUED &   SHARES ISSUED &
         SERIES OF PREFERRED STOCK                      OUTSTANDING       OUTSTANDING
                                                        (unaudited)

         Series A convertible...........................    82,655             82,655
         Series B convertible, 10% cumulative dividend..   365,106            365,106
         Series C convertible, 10% cumulative dividend..   262,833            262,833
         Series D convertible, 10% cumulative dividend..   175,000            175,000
         Series E convertible, 10% cumulative dividend..   233,598            233,598
                                                         ---------        -----------
              Total Preferred Stock..................... 1,119,192          1,119,192
                                                         =========        ===========
</TABLE>


                                       13
<PAGE>

SUMMARY OF PREFERRED STOCK TERMS

SERIES A CONVERTIBLE PREFERRED STOCK
Liquidation Value: $4.50 per share
Conversion Price:  $10.3034 per share
Conversion Rate:   0.4367--Liquidation Value divided by Conversion Price
                   ($4.50/$10.3034)
Voting Rights:     None
Dividends:         None
Conversion Period: Any time

SERIES B CONVERTIBLE PREFERRED STOCK
Liquidation Value: $4.00 per share
Conversion Price:  $1.00 per share
Conversion Rate:   4.00--Liquidation Value divided by Conversion Price
                   ($4.00/$1.00)
Voting Rights:     None
Dividends:         10%--Quarterly--Commencing March 31, 2001
Conversion Period: Any time
Cumulative dividends in arrears at June 30, 2005 were $645,761

SERIES C CONVERTIBLE PREFERRED STOCK
Liquidation Value: $3.00 per share
Conversion Price:  $0.60 per share
Conversion Rate:   5.00--Liquidation Value divided by Conversion Price
                   ($3.00/$0.60)
Voting Rights:     None
Dividends:         10%--Quarterly--Commencing March 31, 2002
Conversion Period: Any time
Cumulative dividends in arrears at June 30, 2005 were $288,721

SERIES D CONVERTIBLE PREFERRED STOCK
Liquidation Value: $10.00 per share
Conversion Price:  $1.00 per share
Conversion Rate:   10.00--Liquidation Value divided by Conversion Price
                   ($10.00/$1.00)
Voting Rights:     None
Dividends:10%--Quarterly--Commencing  April 30, 2002 Conversion  Period:Any time
Cumulative dividends in arrears at June 30, 2005 were $641,507

SERIES E CONVERTIBLE PREFERRED STOCK
Liquidation Value: $22.00 per share
Conversion Price:  $0.80 per share
Conversion Rate:   27.50--Liquidation Value divided by Conversion Price
                   ($22.00/$0.80)
Voting Rights:     Equal in all respects to holders of common shares
Dividends:         10%--Quarterly--Commencing May 31, 2002
Conversion Period: Any  time
Cumulative dividends in arrears at June 30, 2005 were $1,803,806

         ISSUANCE OF COMMON SHARES FOR CASH

         Beginning  in December  2004,  MDI began an offering of common stock to
accredited investors in exchange for cash. As part of the offering,  MDI granted
each investor a warrant to purchase  common stock at an exercise  price of $0.10
per share, with the first $250,000 of investment to receive 50% warrant coverage
and subsequent investments in excess of $250,000 to receive 25% coverage.


                                       14
<PAGE>

         In the  second  quarter  of  fiscal  2005,  the  Company  received  net
aggregate  proceeds  of $122,000  and issued an  aggregate  2,250,000  shares of
restricted  common  stock,  as well as warrants to  purchase  562,500  shares of
common stock, in connection with the offering begun in December 2004. MDI valued
the warrants at $23,671 using the Black-Scholes valuation model and recorded the
amount to additional  paid-in-capital  - warrants for the quarter ended June 30,
2005.  These  amounts  were in  addition to net  aggregate  proceeds of $521,050
raised by the Company in the first  quarter of 2005,  with  respect to which the
Company issued an aggregate 9,608,334 shares of restricted common stock, as well
as  warrants  to  purchase  2,402,084  shares of common  stock.  MDI  valued the
warrants at $183,775 using the  Black-Scholes  valuation  model and recorded the
amount to additional  paid-in-capital - warrants for the quarter ended March 31,
2005.

         ISSUANCE OF WARRANTS FOR SERVICES

         In May 2005, MDI issued  warrants to purchase  556,500 shares of common
stock  with an  exercise  price of $0.06 per share to a  non-employee  financial
consultant for past financial services. MDI valued the warrants at $25,265 using
the  Black-Scholes  valuation  model  and  recorded  the  amount  to  additional
paid-in-capital - warrants for the quarter ended June 30, 2005.

         APPLICATION OF BLACK-SCHOLES VALUATION MODEL

         In applying the Black-Scholes  valuation model, the Company has used an
expected  dividend  yield of zero; a risk-free  interest rate of 4.28% and 5.33%
for the June 30, 2005 and 2004 periods, respectively; volatility factors of 117%
and 173%,  respectively;  and a fair value of the underlying common shares equal
to the  closing  market  price  of such  shares  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

         On  May  25,  1999,  stockholders  approved  the  establishment  of the
Company's 1999 Equity Incentive Plan (the "Plan")  effective as of June 1, 1999.
The Plan provides that the Board may grant various forms of equity incentives to
directors,  employees,  and consultants,  including but not limited to incentive
stock options,  non-qualified  stock options,  stock  appreciation  rights,  and
restricted  stock awards.  Awards under the Plan are  exercisable at fair market
value  determined  as of the date of grant in  accordance  with the terms of the
Plan.  Awards vest  immediately or ratably over periods ranging from two to five
years, and expire five to ten years from the date of grant.

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

         The Board of  Directors  has also  granted  options to purchase  common
stock of MDI outside of the Plan.

         As permitted by SFAS No. 123, MDI applies  Accounting  Principles Board
Opinion  No.  25,  "Accounting  for  Stock  Issued  to  Employees"  and  related
interpretations  in accounting for options  granted to employees under the Plan.
No  compensation  cost was recorded during the six months ended June 30, 2005 or
the year ended  December  31,  2004 for  options  granted to  employees,  as the
exercise  prices of such options  approximated  the fair value of the underlying
common  stock on the date of the grant.  Had stock  options been  accounted  for
under the fair value method  recommended by SFAS No. 123, the Company's net loss
allocated  to  common  shareholders  would  have been  changed  to the pro forma
amounts indicated below:


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                 FOR THE SIX MONTHS ENDED, FOR THE THREE MONTHS ENDED
                                                                           JUNE 30,                JUNE 30,
                                                                     2005         2004          2005        2004
                                                                  ----------    ---------    --------    ---------
<S>                                                               <C>           <C>          <C>         <C>
                                                                       (in thousands except for per share amounts)
                                                                                        (unaudited)
NET LOSS APPLICABLE TO COMMON
       SHAREHOLDERS AS REPORTED...............................    $   (2,396)   $  (4,239)   $ (1,019)   $  (1,879)
Deduct: Total stock-based compensation
      expense determined under the fair value based
             method for all awards and forfeitures,
net of related taxes..........................................            (9)        (171)         (6)         (14)
                                                                  ----------    ---------    --------    ---------
PRO FORMA NET LOSS APPLICABLE TO
      COMMON SHAREHOLDERS.....................................    $   (2,405)   $  (4,410)   $ (1,025)   $  (1,893)
                                                                  ==========    =========    ========    =========

Basic and diluted loss per share applicable to common
shareholders - as reported....................................    $     (.02)   $    (.07)   $   (.01)   $    (.03)
                                                                  ==========    =========    ========    =========
Basic and diluted loss per share applicable to common
         shareholders - pro forma.............................    $     (.02)   $    (.07)   $   (.01)   $    (.03)
                                                                  ==========    =========    ========    =========
</TABLE>

         The fair value for these options was estimated at the date of the grant
using a Black-Scholes  option pricing model with the following  weighted average
assumptions:  risk-free  interest rates of 4.28% and 5.33% for the June 30, 2005
and 2004 periods, respectively;  volatility factors of the expected market price
of the Company's common stock of 117% and 173%,  respectively;  and a fair value
of the underlying common shares equal to the closing market price of such shares
on the date of the grant.  The expected  life equaled the term of the options or
restricted shares.

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

                                                                   WEIGHTED
                                                                    AVERAGE
                                                                   EXERCISE
                                                  OPTIONS            PRICE
                                                -----------       -----------
OUTSTANDING AT JANUARY 1, 2004.................   3,494,648
Granted........................................   2,500,000       $    0.1540
Forfeited......................................  (1,046,921)      $    1.0276
                                                -----------
OUTSTANDING AT DECEMBER 31, 2004...............   4,947,727
Granted........................................          --
Expired........................................    (438,736)      $    2.6000
Forfeited......................................    (250,000)      $    0.1400
                                                -----------
OUTSTANDING AT JUNE 30, 2005...................   4,258,991
                                                ===========
EXERCISABLE AT JUNE 30, 2005...................   3,545,658       $    0.5845
                                                ===========

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

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


NOTE 10. SUBSEQUENT EVENTS

         Not applicable.


                                       16
<PAGE>

NOTE 11. LEGAL PROCEEDINGS

         Included below is a summary of legal proceedings  involving the Company
that were either  initiated  in the fiscal  quarter  ended June 30, 2005 or with
respect to which a material development occurred during such quarter. For a more
detailed  discussion of all legal  proceedings  involving  the Company,  see the
Company's  Annual  Report on Form 10-KSB for the fiscal year ended  December 31,
2004.

         SETTLED  DURING THE QUARTER ENDED JUNE 30, 2005

         The  Cleveland  Clinic  Foundation.  On March 28, 2003,  The  Cleveland
Clinic  Foundation filed suit against MDI (U.S.  District Court for the Northern
District of Ohio, Eastern Division (Case No. 1:03CV0561)) seeking  approximately
$315,000 for certain  clinical  trial work  conducted by the  Foundation  in the
Peoples  Republic  of China on behalf of MDI.  On  December  8, 2003,  a default
judgment in the amount of $260,000 was entered  against  MDI. In June 2005,  the
parties executed a settlement agreement and mutual release. The second and final
payment under the  settlement  agreement  was due by July 18, 2005.  MDI has not
made that payment,  and The Cleveland  Clinic has declared MDI in default of the
settlement agreement.  Under the settlement agreement,  if MDI misses a payment,
The Cleveland  Clinic may declare the agreement void but must credit MDI for its
first payment of $26,000.  As of June 30, 2005,  MDI had recorded a liability in
the amount of $245,663.

         MATERIAL DEVELOPMENTS DURING THE QUARTER ENDED JUNE 30, 2005

         Ungaretti & Harris.  On May 31, 2004,  the law firm  Ungaretti & Harris
LLP filed an amended  complaint against MDI in the Circuit Court of Cook County,
Illinois (04 L 1101),  to collect 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  $195,500,  plus costs of
suit. The parties  subsequently  entered into a settlement  agreement to satisfy
the judgment.  Under the agreement,  MDI's payments to Ungaretti & Harris should
conclude in 2006.  Ungaretti  & Harris  declared  the  settlement  agreement  in
default  for MDI's  failure to make the second  payment  on June 21,  2005.  The
parties  are in  negotiations  to modify  the  settlement  agreement.  Under the
settlement  agreement,  the entire  balance of the  judgment,  plus interest and
costs (less the first payment of $25,000),  is due upon default.  As of June 30,
2005, MDI had recorded a liability in the amount of $166,562.

         The Regents of the  University  of  California.  On May 28,  2004,  The
Regents of the  University of California  filed suit against MDI in the Superior
Court of California, County of San Francisco (CGC-04-431944).  The University of
California  claims that MDI breached an agreement to sponsor a research  project
for a period of one year. The complaint seeks compensatory damages in the amount
of  $57,529.80  and  additional  lost  opportunity  damages  in  the  amount  of
$75,220.20.  In January 2005,  the  University of California  requested that the
court enter a default judgment  against MDI in the amount of $132,826.50,  which
includes  court  costs.  The  parties  are  currently   involved  in  settlement
negotiations  with respect to this matter. As of June 30, 2005, MDI had recorded
a liability in the amount of $132,715.

         NEW AS OF JUNE 30, 2005

         Peter  Gombrich.  On April 25,  2005,  former MDI officer and  director
Peter  Gombrich  filed suit  against  MDI in the Circuit  Court of Cook  County,
Illinois (05 L 4543). Mr. Gombrich claims that MDI breached a written employment
contract  and  that it  owes  him in  excess  of  $849,500  (plus  interest  and
attorneys' fees). Mr. Gombrich also alleges a claim against MDI for contribution
and indemnification  regarding  agreements he signed as a personal guarantor for
certain  alleged  obligations  of MDI.  MDI filed a motion to compel the case to
arbitration,  consistent with Mr. Gombrich's employment  agreement.  This motion
was granted on August 9, 2005.  MDI  intends to  vigorously  defend  against Mr.
Gombrich's claims in the arbitration  proceeding and is currently evaluating any
claims it may have against Mr. Gombrich.

         MISCELLANEOUS

         Creditors and Employees.  Several current or former unsecured creditors
have made claims against MDI to collect past due amounts for goods and services.
MDI has  recorded  the amounts due in its  records and is  attempting  to settle
these claims.

         MDI also expects to negotiate and resolve  certain wage claims  brought
by former employees seeking to collect for unpaid wages and severance  benefits.
MDI has  recorded  the amounts  due in its records and expects to resolve  these
claims. MDI does not consider any of these claims to be material.


                                       17
<PAGE>

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,"   and   similar   expressions   constitute
forward-looking  statements.  In  addition,  any  statements  concerning  future
financial  performance  (including  future revenues,  earnings or growth rates),
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,  assumptions  and  information
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,  2004 under the
caption "Risk  Factors" and in subsequent  reports filed with the Securities and
Exchange  Commission.  Should  one or  more  of  those  risks  or  uncertainties
materialize or should underlying expectations, projections and assumptions prove
incorrect, actual results may vary materially from those described. Those events
and  uncertainties  are difficult to predict  accurately and many are beyond our
control. We assume no obligation to update these  forward-looking  statements to
reflect events or  circumstances  that occur after the date of these  statements
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., formerly Ampersand Medical Corporation, is
a  biomolecular  diagnostics  company  focused on the  design,  development  and
commercialization  of  cost-effective  screening  systems to assist in the early
detection of cancer.  MDI has currently  curtailed its operations focused on the
design,  development  and marketing of its  InPath(TM)  System and related image
analysis  systems,  and expects to resume such  operations  only when additional
capital has been obtained by the Company. The InPath System and related products
are intended to detect cancer and cancer-related  diseases, and may be used in a
laboratory, clinic or doctor's office.

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

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

         We  have  designed  and  manufactured  the  AcCell(TM)   computer-aided
automated  microscopy  instrument and the AcCell Savant(TM),  an instrument that
includes an AcCell  instrument  and  software  and which  collects  quantitative
cellular information used in support of a diagnostic process.  These instruments
have been sold to laboratories and medical  diagnostic  companies for use in the
customers' proprietary applications, although based on a settlement entered into
with MonoGen, Inc. in 2004, we have transferred certain patents and intellectual
property  rights for the AcCell  instrument to MonoGen.  MDI also entered into a
settlement  agreement  with Dr. Bruce  Patterson  and  Invirion,  Inc.  over the
validity of a certain  technology  license.  MDI agreed to the  termination  and
return of the license to Dr. Patterson and Invirion.

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


                                       18
<PAGE>

         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 six months of 2005,
MDI  raised  net  proceeds  of  $643,050  through  the  sale  of  common  stock.
Management's plans for the remainder of fiscal 2005 include  substantial efforts
to obtain  additional  capital.  During the  quarter  ended June 30,  2005,  the
Company was unable to obtain  adequate  financing or generate  profitable  sales
revenues,   and  was  forced  to  curtail  its  product  development  and  other
activities.  If the Company continues to be unable to obtain adequate financing,
it will be forced to cease operations and may seek bankruptcy protection.

CRITICAL ACCOUNTING POLICIES AND CHANGES TO ACCOUNTING POLICIES

         The  preparation of 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, 2004, 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 Principles 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, 2004.

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, 2004 as filed
with the SEC.

THREE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2004

REVENUE

         Revenues for the three months ended June 30, 2005 decreased $72,000, or
71.3%,  to $29,000 from  revenues of $101,000 for the same period in 2004.  This
decrease  was  the  result  of a  reduction  in  revenue  from  the  sale of our
slide-based  installed  systems and AcCell  instruments.  A table describing the
decrease is provided below:

         Three months ended               6/30/05    6/30/04     Decrease
         ----------------------------    ---------- ----------- ------------
         Slide-based revenue             $ 29,000   $  52,000     $(23,000)
         AcCell instrument sale                 --      49,000     (49,000)
                                         ---------- ----------- ------------
                 Total Revenue            $ 29,000    $101,000    $(72,000)
                                         ========== =========== ============

COSTS AND EXPENSES

         Cost of Goods Sold

         Cost of goods  sold for the  quarter  ended  June  30,  2005  decreased
$25,000, or 100%, to zero from $25,000 for the same period in 2004. The decrease
was due to a related reduction in the sale of AcCell instruments.


                                       19
<PAGE>

         Research and Development

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

         For the quarter ended June 30, 2005,  our R&D expenses were $25,000,  a
decrease of $303,000,  or 92.4%, over the same period in 2004. This decrease was
the  result  of  reduced  operating   capacity  due  to  capital  and  liquidity
constraints.  This  reduction  has  led to  delays  in the  finalization  of the
development,   completion   of  clinical   trial   validation,   Food  and  Drug
Administration  submissions,  market  introduction,  and the sale of some of our
products.

         R&D expenses typically 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.

         Selling, General and Administrative

         For  the   quarter   ended  June  30,   2005,   selling,   general  and
administrative  expenses  ("SG&A")  were  $384,000,  a decrease of $500,000,  or
56.6%,  over  expenses of $884,000  for the same period in 2004.  This  decrease
included a reduction of $595,000 in financing costs, $95,000 in consulting fees,
$127,000  in investor  relations  expenditures,  $231,000  in other  general and
administrative  costs  and  $124,000  in  legal  and  professional  fees.  These
decreases  were  offset by a period  difference  of  $672,000  in  restructuring
settlement income.

         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;  amortization/depreciation  charges; and restructuring settlement income.
Restructuring  settlements  reflect the difference between the actual settlement
amounts for various  litigation  and  creditor  payment  matters and the amounts
originally  recorded on the  Company's  financial  statement  as the amount due.
Settlement amounts were less than amounts originally  recorded in recognition of
the Company's financial condition.

OTHER INCOME AND EXPENSE

         Interest Expense

         Interest  expense,  including  interest  expense  to  related  parties,
decreased $74,000 for the quarter ended June 30, 2005 to $411,000, a decrease of
15.3% over the same  period of 2004.  Bridge I, II, III,  IV, and related  party
convertible  promissory  notes  in  principal  amounts  totaled  $6,356,000  and
$6,672,000 for the fiscal  quarters  ended June 30, 2005 and 2004,  respectively
The change  included an decrease  in interest  expense of $3,000  related to the
decrease in the outstanding notes and the lower interest rates on the Bridge III
and IV notes and a decrease  of  $71,000  related  to the  amortization  of debt
discount arising from the beneficial conversion feature of certain of the notes.
The amortized debt discount amount  decreased due to an increase in the duration
of the new Bridge III and IV notes issued during 2004 in relation to the shorter
maturity periods of the Bridge I and II notes issued during 2001 through 2003.

NET LOSS

         The net loss for the  three-month  period  ended June 30,  2005  before
preferred  dividends  totaled  $791,000,  compared with  $1,621,000 for the same
period in 2004, a decrease of $830,000 or 51.2%.  The decrease was primarily the
result of reduced operating capacity due to capital and liquidity constraints as
well as a reduction in interest expense.  In addition,  cumulative  dividends on
the Company's  outstanding Series B, Series C, Series D and Series E convertible
preferred stock totaled  $228,000 for the quarter ended June 30, 2005,  compared
with  $258,000 for the same period in 2004.  The net loss  applicable  to common
stockholders  for the three months ended June 30, 2005 was $1,019,000,  or $0.01
per share,  on  111,463,812  weighted  average common shares  outstanding.  This
compared with the net loss applicable to common stockholders for the three-month
period  ended June 30, 2004 of  $1,879,000,  or $0.03 per share,  on  73,839,577
weighted average common shares outstanding.


                                       20
<PAGE>

  SIX MONTHS ENDED JUNE 30, 2005 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2004

REVENUES

         Revenues for the six months ended June 30, 2005 decreased  $85,000,  or
55.2%,  to $69,000 from  revenues of $154,000 for the same period in 2004.  This
decrease  primarily was the result of decreases in the sales of  AccuMed-related
products and services. A table describing the decrease is provided below:

         Six months ended                 6/30/05    6/30/04     Decrease
         ----------------------------    ---------- ----------- ------------
         Slide-based revenue             $   69,000 $   105,000 $    (36,000)
         AcCell instrument sale                  --      49,000      (49,000)
                                         ---------- ----------- ------------
                                         $  69,000  $   154,000 $    (85,000)
                                         ========== =========== ============

COSTS AND EXPENSES

         Cost of Goods Sold

         Cost of goods sold for the six months  ended June 30, 2005 were zero, a
decrease of $25,000,  or 100%,  over the same period in 2004.  The cost of goods
sold  amount  reported  in 2004 is  related  to the  shipment  of two  automated
microscopy systems during the six months ended June 30, 2004.

         Research and Development

         As noted above, we devote a substantial  amount of our resources to R&D
related to new products,  including  markers,  tests,  instruments  and software
applications, as well as modifications and refinements of our existing products.

         For the six months ended June 30, 2005,  our R&D expenses were $97,000,
a decrease of $388,000,  or 80.0%,  over the same period in 2004.  This decrease
was the result of  reduced  operating  capacity  due to  capital  and  liquidity
constraints.  This  reduction  has  led to  delays  in the  finalization  of the
development,   completion   of  clinical   trial   validation,   Food  and  Drug
Administration  submissions,  market  introduction,  and the sale of some of our
products.

         R&D expenses typically 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.

         Selling, General and Administrative

         For  the  six  months  ended  June  30,  2005,  selling,   general  and
administrative expenses ("SG&A") were $1,101,000,  a decrease of $1,037,000,  or
48.5%,  over expenses of $2,138,000  for the same period in 2004.  This decrease
included a reduction of  $1,002,000  in financing  costs,  $252,000 in legal and
professional fees,  $128,000 in consulting fees,  $194,000 in investor relations
expenditures  and  $393,000 in other  general and  administrative  costs.  These
decreases  were  offset by  period  differences  of  $833,000  in  restructuring
settlement income and $99,000 in gain on the sale of fixed assets.

         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;  amortization/depreciation  charges; and restructuring settlement income.
Restructuring  settlements  reflect the difference between the actual settlement
amounts for various  litigation  and  creditor  payment  matters and the amounts
originally  recorded on the  Company's  financial  statement  as the amount due.
Settlement amounts were less than amounts originally  recorded in recognition of
the Company's financial condition.


                                       21
<PAGE>

OTHER INCOME AND EXPENSE

         Interest Expense

         Interest  expense,  including  interest  expense  to  related  parties,
decreased  $371,000 for the six-month period ended June 30, 2005 to $814,000,  a
decrease  of 31.3%  over the same  period of 2004.  Bridge I, II, III and IV and
related  party  convertible   promissory  notes  in  principal  amounts  totaled
$6,356,000  and  $6,672,000  for the  periods  ended  June 30,  2005  and  2004,
respectively.  The change  included a decrease  in  interest  expense of $12,000
related to the decrease in the outstanding notes and lower interest rates on the
Bridge III and IV notes and a decrease of $359,000  related to the  amortization
of debt discount  arising from the beneficial  conversion  feature of the notes.
The amortized debt discount amount  decreased due to an increase in the duration
of the new Bridge III and IV notes issued  during the period ended June 30, 2004
in relation to the shorter  maturity periods of the Bridge I and II notes issued
during the period ended June 30, 2003.

NET LOSS

         The net loss for the  six-month  period  ended  June  30,  2005  before
preferred  dividends totaled  $1,943,000,  compared with $3,669,000 for the same
period in 2004, a decrease of  $1,726,000  or 47.0%.  The decrease was primarily
the  result  of  reduced  operating   capacity  due  to  capital  and  liquidity
constraints.  In addition,  cumulative  dividends on the  outstanding  Series B,
Series C, Series D and Series E convertible preferred stock totaled $453,000 for
the  six-month  period ended June 30, 2005,  compared with $570,000 for the same
period in 2004. The combined net loss applicable to common  stockholders for the
six months ended June 30, 2005 of $2,396,000, or $0.02 per share, on 107,330,150
weighted  average common shares  outstanding  compared with the net loss and net
loss available to common  stockholders  for the six-month  period ended June 30,
2004 of $4,239,000,  or $0.07 per share, on 64,826,113  weighted  average common
shares outstanding.

         The weighted  average  shares  outstanding  during the six months ended
June 30, 2004 include the shares issued or issuable upon conversion of Series B,
Series C, and Series E convertible  preferred  stock during the period,  and the
conversion of Bridge I and Bridge II convertible  promissory notes. The Bridge I
and II note  conversions  resulted in the  issuance of an  aggregate  26,399,311
shares of  common  stock;  the  Series B, C and E  convertible  preferred  stock
conversions  resulted in the issuance of an aggregate 8,807,371 shares of common
stock.

LIQUIDITY AND CAPITAL RESOURCES

         Research  and  development,  clinical  trials and other  studies of the
components of our InPath System,  conversions  from designs and prototypes  into
product manufacturing,  initial sales and marketing efforts, medical consultants
and advisors, and research, administrative, professional and executive personnel
fees 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 $638,000 and $2,779,000 for the
six months ended June 30, 2005 and 2004, respectively, in operating activities.

         We experienced  severe  liquidity  problems during the six months ended
June 30,  2005.  As a  result,  we were  forced  to cut  staff  and  reduce  our
operations to a minimum level.  Officers  refrained from drawing salaries during
portions of the first and second  quarters of 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 as well as for the
payment of a limited amount of current operational expenses.

         At June 30,  2005,  we had $1,000  cash on hand,  a decrease of $10,000
over cash on hand at December 31, 2004 of $11,000.  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 small life sciences companies such as ours. We were unable to raise
sufficient  funds during the six months ended June 30, 2005 in order to maintain
adequate  cash  reserves  and to  meet  the  ongoing  operational  needs  of the
business.


                                       22
<PAGE>

         We incurred $10,000 in capital expenditures during the first six months
of 2005 versus  capital  expenditures  of  $198,000  for the first six months of
2004, a decrease of 94.9%. 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. During the six
months ended June 30, 2005, the Company was unable to raise sufficient  adequate
capital or generate  profitable  sales  revenues,  and was forced to curtail its
product development and other activities.  If the Company continues to be unable
to obtain adequate financing, it will be forced to cease operations and may seek
bankruptcy protection.

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.

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

         See Note 11 - Legal Proceedings in the Notes to Consolidated  Financial
Statements  included herein for a discussion of the most recent events regarding
the Company's legal  proceedings,  which  information is incorporated  herein by
reference.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

CHARTER AMENDMENT

         At the  Company's  Annual  Meeting of  Stockholders  on June 13,  2005,
stockholders approved an amendment to the Company's Certificate of Incorporation
(as amended to date) to increase the number of authorized shares of common stock
of the Company from 300,000,000 to 375,000,000 shares. The Company has not filed
a  Certificate  of  Amendment  to its charter to effect such  increase  with the
Delaware  Secretary of State as of the filing date of this  Quarterly  Report on
Form 10-QSB, but expects to file within the next ninety days.


                                       23
<PAGE>

UNREGISTERED SALES OF EQUITY SECURITIES

         Common  Stock.  Beginning  in December  2004,  MDI began an offering of
common  stock to  accredited  investors  in  exchange  for cash.  As part of the
offering,  MDI granted  each  investor a warrant to purchase  common stock at an
exercise  price of $0.10 per share,  with the first  $250,000 of  investment  to
receive 50% warrant coverage and subsequent investments in excess of $250,000 to
receive 25% coverage.

         In the second  quarter of fiscal  2005,  the Company had  received  net
aggregate  proceeds  of $122,000  and issued an  aggregate  2,250,000  shares of
restricted  common  stock,  as well as warrants to  purchase  562,500  shares of
common  stock in  connection  with such  offering.  MDI valued the  warrants  at
$23,671  using the  Black-Scholes  valuation  model and  recorded  the amount to
additional paid-in-capital - warrants for the quarter ended June 30, 2005.

         Warrants.  In May 2005, MDI issued warrants to purchase  556,500 shares
of common  stock  with an  exercise  price of $0.06 per share to a  non-employee
financial  consultant  for past financial  services.  MDI valued the warrants at
$25,265  using the  Black-Scholes  valuation  model and  recorded  the amount to
additional paid-in-capital - warrants for the quarter ended June 30, 2005.

         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 second  quarter of fiscal 2005,  neither the Company nor any
affiliated purchaser of the Company purchased equity securities of MDI.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         As of June 30,  2005,  MDI was in breach of the  following of its notes
payable.  For more  discussion  regarding  certain of these notes,  see Note 7 -
Notes  Payable  and Note 11 - Legal  Proceedings  in the  Notes to  Consolidated
Financial  Statements  included in this Quarterly  Report on Form 10-QSB for the
quarter ended June 30, 2005.


                                       24
<PAGE>

         Bridge I. The Bridge I Convertible Promissory Notes were originally due
July 30, 2002, which maturity date was extended until December 31, 2002 by offer
of the  Company.  Each  Bridge I  noteholder  has the  option,  upon an event of
default,  to declare  the unpaid  principal  balance  and all  accrued  interest
immediately  due and payable  upon  written  notice of default  and demand.  The
Company, upon such notice, is given five days to cure such default. The Bridge I
notes define event of default as: (i) the Company's  failure to make any payment
of  principal,  interest  or other  charges on or before the date due;  (ii) the
Company's  breach of any  agreement  or  covenant  contained  in the note or any
document or instrument  relating to the  indebtedness  evidenced by the note; or
(iii) dissolution, liquidation or termination of the Company. The Bridge I notes
provide that upon the  declaration  of a default,  the balance of the  principal
remaining  unpaid,  interest  accrued thereon and all other costs and fees shall
bear interest at the rate of 18% per annum from the date of default. The Company
is  also  obligated  to  pay  all  costs  of  collection,  including  reasonable
attorneys' fees.

         As of June 30,  2005,  MDI had not  received a written  declaration  of
default from the holder of any  outstanding  Bridge I note. As of June 30, 2005,
MDI had recorded  principal  and interest  outstanding  on the Bridge I notes of
$750,000 and $161,834, respectively.

         Bridge II. The Bridge II Convertible  Promissory  notes were originally
due July 31, 2003, which maturity date was extended until July 31, 2004 by offer
of the  Company.  The Bridge II notes  provide  that upon the  declaration  of a
default under the notes, the balance of the principal  remaining unpaid,  unpaid
accrued interest and all other costs and fees shall bear interest at the rate of
15% per annum from the date of default.  In  addition,  in the event of default,
the Company and all other parties liable on the notes agreed to pay all costs of
collection, including reasonable attorneys' fees.

         The events  constituting  an event of default under the Bridge II notes
are those events of default specified in the Security  Agreement entered into in
connection with the Bridge II notes offering, and Bridge II noteholders have all
of the  rights  granted to them under  such  Security  Agreement  as well as the
Indenture and Collateral Sharing Agreement executed by the parties. The Security
Agreement  provides that the occurrence of any of the following would constitute
an event of default under the Bridge II notes: (i) MDI fails to pay principal or
interest  on the  maturity  date;  (ii) MDI  fails to  perform  any of its other
covenants  under the Security  Agreement,  the notes,  or the Indenture that are
material  to the  debtor or the  rights of any  Bridge  II  noteholder  and such
failure continues for 10 days after receipt of written notice thereof; (iii) MDI
admits in writing its  inability to pay its debts  generally as they become due,
or makes an  assignment  for the benefit of  creditors  or files any petition or
action for relief under any bankruptcy, reorganization, insolvency or moratorium
law or any other  laws for the  relief of or  relating  to  debtors;  or (iv) an
involuntary petition is filed under any bankruptcy or insolvency statute against
MDI or a custodian,  receiver or trustee is appointed to take  possession of any
property or assets of the debtor  (unless the petition or  appointment  has been
set aside or withdrawn or ceases to be in effect within 30 days from the date of
said filing or appointment).

         Upon the  occurrence  of any event of  default  arising  from a payment
default or covenant default,  the Security Agreement provides that the Bridge II
noteholders   may  authorize  the  declaration  of  all  amounts  due  from  MDI
immediately  due and  payable  without  notice or  demand of any kind.  Upon the
occurrence of any default arising from insolvency or bankruptcy, all amounts due
from MDI automatically and immediately become due and payable without any action
on the part of the noteholders or otherwise.

         The covenants of MDI, as debtor, agreed to by the Company and set forth
in the Security  Agreement  include but are not limited to: (i) not changing its
name,  jurisdiction or organization or legal  structure  without  consent;  (ii)
taking reasonable actions to maintain,  preserve and defend the collateral under
the  Security  Agreement  and  executing  such  documents  as may be required to
perfect any security interest in such collateral;  (iii) after the occurrence of
an event of default,  providing  evidence of  ownership of the  collateral  upon
request;  (iv) keeping at its office adequate records concerning the collateral;
(v)  making  entries  upon its  financial  statements  and books and  records to
disclose the  security  interest in the  collateral;  (vi)  providing  financial
statements and information as reasonably requested;  (vii) immediately providing
notice of material loss or  depreciation  in the value of the  collateral or any
event  which is or would  become an event of  default;  and (viii) not  selling,
transferring,  or disposing of, or except in the ordinary  course of business or
as permitted, pledging, mortgaging, granting a security interest in or otherwise
encumbering the collateral or any of MDI's assets.

         The secured  party/collateral  agent under the Bridge II notes offering
documents has the option (but not the duty),  during the continuance of an event
of default,  to perform any agreement of MDI that the Company failed to perform,
and  take  any  action  he  deems  reasonably  necessary  or  desirable  for the
preservation of the collateral and the secured  party's  interest  therein.  The
secured  party's rights upon the continuance of an event of default also include
the taking of any action to realize upon the  collateral  (including any sale or
other  disposition  at any  private  or  public  sale for cash or  credit),  the
discharge of taxes, liens, security interests and other encumbrances levied upon
the collateral, and the discharge or keeping current of any of MDI's obligations
having any effect on the collateral. The noteholders also authorized the secured
party/collateral  agent to demand or sue for all monies due with  respect to the
collateral  and  commence,  file,  prosecute  and defend any claim or proceeding
related to the collateral.


                                       25
<PAGE>

         As of June 30, 2005,  MDI was not aware of any  noteholder  or group of
noteholders having authorized a declaration of default of any outstanding Bridge
II  notes.  As of  June  30,  2005,  MDI had  recorded  principal  and  interest
outstanding on the Bridge II notes of $1,300,000 and $495,934, respectively.

         Monsun AS. The Monsun AS note was  originally due November 1, 2000, but
the parties agreed to three  extensions of the maturity date, with July 31, 2002
as the final maturity date.  Pursuant to the third and final maturity  extension
agreement between the parties, each of the following occurrences  constituted an
event of default  under the Monsun note:  (i) failure to pay when due  specified
interest;  (ii) failure to pay when due all unpaid  principal and other interest
due by July 31,  2002;  (iii) the  material  breach or failure  to  observe  any
provision of the extension agreement;  or (iv) the insolvency or general failure
of MDI to pay its debts as they become due,  MDI's  admission  in writing of its
inability  to pay debts  generally,  MDI's making a general  assignment  for the
benefit of  creditors,  the  institution  of any  proceeding  by or against  MDI
seeking an order for relief or to adjudicate  MDI bankrupt or insolvent,  or the
institution  of any other  proceeding  against  MDI under  any law  relating  to
bankruptcy,  insolvency  or relief of debtors or seeking  the  appointment  of a
receiver,  trustee or similar  official for MDI or any substantial part of MDI's
assets. Upon the occurrence of an event of default,  the entire principal amount
outstanding  under the Monsun note,  including any unpaid and accrued  interest,
becomes at once due and payable  without  presentment,  demand or protest or any
other  requirements  of any kind. The note also provided that at all times after
July 31,  2002,  the note would begin to accrue  interest at the rate of 20% per
annum to the extent there was unpaid principal or accrued and unpaid interest.

         Following the failure to pay  principal  and interest when due,  Monsun
initiated  legal  action  against  Peter  Gombrich,  MDI's  then-Chairman,  as a
personal  guarantor on the Monsun note in January 2003. 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  attorney's  fees
against  Peter  Gombrich  as the  personal  guarantor.  These  judgments  remain
unsatisfied.

         As of June 30, 2005, MDI had recorded principal and accrued interest on
the Monsun note and the legal fee award  outstanding  of $864,000 and  $438,000,
respectively.  As of June 30, 2005,  Monsun had not  initiated  any legal action
against MDI directly to collect any amounts due or otherwise.

         MonoGen,  Inc.  The MonoGen,  Inc.  note was the result of a settlement
agreement  reached in October 2004 as discussed in Note 7 - Notes Payable in the
Notes to Consolidated  Financial Statements included in this Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2005.  The MonoGen note provides that
in the event of (i) a failure by MDI to pay any amount due under the note within
10 days of the date  due,  (ii) a  breach  by MDI of any  covenant,  obligation,
representation or warranty made in the note, the parties' Settlement  Agreement,
or a License Agreement entered into in connection with the settlement,  or (iii)
MDI becoming the subject of bankruptcy or other insolvency proceedings, then, in
any such event,  in addition to all rights MonoGen may have under the Settlement
Agreement,  any related  agreement  or any  applicable  law,  MonoGen may at its
option and without notice or demand declare any or all of MDI's  obligations and
indebtedness  under the note  immediately  due and  payable.  At such time,  any
unpaid  principal  and unpaid  accrued  interest  would  become due and payable,
together  with  interest  thereafter  at a default rate of 14% until the note is
paid in full.  In  addition,  MDI would be liable for the costs and  expenses of
collection, including reasonable attorneys' fees and legal expenses.

         MDI  covenanted in the note that it would not,  directly or indirectly,
declare or pay any  dividends  or make any loans or advances to, or guarantee or
otherwise become liable upon the obligation of, any person or entity controlling
or affiliated with the Company.

         MDI   covenanted  in  the   Settlement   Agreement  to  assign  certain
intellectual  property and deliver  certain assets to MonoGen.  The Company also
agreed that it would not amend or modify  specified  agreements  relating to the
technology  subject to the  settlement  and would not enter into new  agreements
without MonoGen's consent.

         As discussed in Note 7 - Notes Payable, inasmuch as the assets were not
timely transferred, and because the initial $25,000 payment to be made under the
MonoGen note was not paid by its due date, MonoGen delivered a notice of default
to the Company and AccuMed in November  2004 and MDI has not cured such default.
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.


                                       26
<PAGE>

         As of June 30, 2005,  MDI had recorded  principal and accrued  interest
outstanding of $305,000 and $28,081,  respectively,  with respect to the MonoGen
note.

         Ungaretti  & Harris.  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 had 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
promised to pay  $150,000 to the law firm,  payable in  installments  of $25,000
commencing  March 22, 2005,  with  subsequent  payments due in 90 day increments
until the balance was paid in full. The settlement  agreement also provided that
should  any  payment  be more than 15 days  late,  Ungaretti  & Harris  would be
entitled to notify the Company of default and declare the  settlement  agreement
terminated;  if the settlement  agreement was terminated because of such payment
default, the entire balance of the judgment, interest and costs would become the
obligation of the Company, less any payments made.

         As discussed in Note 7 - Notes Payable,  MDI is currently in default on
the June 21, 2005 payment due and is in discussions with Ungaretti & Harris.  In
the event that payment is not made or a resolution is not reached with Ungaretti
& Harris,  the entire  balance of the judgment,  interest and costs would be due
and  payable  as noted  above.  In  addition,  Ungaretti  & Harris has a secured
position  in all  assets of the  Company  as part of the  Bridge  II  collateral
agreement.

         As of June 30, 2005,  MDI had recorded  principal and accrued  interest
outstanding of $149,000 and $17,630, respectively,  with respect to the $150,000
Ungaretti & Harris note.

         Ernst & Young  LLP.  The  maturity  date of the Ernst & Young  note was
December 31, 2003.  Peter  Gombrich,  MDI's former  officer and  director,  is a
personal  guarantor  on such  note and is  obligated  to make  payment  when the
Company  defaults on the note,  Ernst & Young has given  written  notice of such
default to the  Company,  and the  Company  fails to cure within 30 days of such
notice.

         The note  provides  only  that in the  event  the  principal  amount of
$30,800 is not paid by the maturity  date, the Company would be obligated to pay
interest at the rate of 12% per annum, or the maximum legally  enforceable  rate
(whichever is less), on any overdue principal amount commencing  January 1, 2004
and on the first day of each month  thereafter  until paid in full. In addition,
in such circumstances,  MDI is obligated to pay all reasonable expenses incurred
by Ernst & Young,  including  attorneys' fees, in enforcing its rights under the
note.

         As of June 30,  2005,  MDI had not  received a written  declaration  of
default from Ernst & Young. As of June 30, 2005, MDI had recorded  principal and
accrued interest outstanding of $31,000 and $6,041,  respectively,  with respect
to the Ernst & Young note.

         Ventana  Medical  Systems,  Inc.  The note in favor of Ventana  Medical
Systems  matured on  December  31,  2003.  According  to such  note,  any of the
following  constitutes  an  event  of  default:  (i)  failure  by MDI to pay the
principal of the note when due and payable on the maturity date; (ii) failure of
MDI to  perform  any of the  covenants,  conditions,  provisions  or  agreements
contained in the note and such  failure  remains  uncured 15 days after  written
notice of  default  has been  given;  or (iii) the entry of an order for  relief
under  federal  bankruptcy  laws as to MDI or entry of any  order  appointing  a
receiver or trustee or approving a petition in  reorganization  or other similar
relief and if such order, if involuntary,  is not satisfied or withdrawn  within
60 days after entry  thereof,  or the filing of a petition by MDI seeking any of
the  foregoing  or  consenting  thereto,  or the  filing of a  petition  to take
advantage of any  debtor's  act, or the making of a general  assignment  for the
benefit of creditors, or admitting in writing its inability to pay debts as they
mature.

         Upon any  event of  default,  Ventana  has the  option to  declare  all
amounts  due under the note  immediately  due and payable and may take action to
accelerate  the  note,  provided  that if  such  event  of  default  relates  to
bankruptcy  or  insolvency,  all amounts due shall  become  immediately  due and
payable without any action on the part of the noteholder.  MDI is also obligated
to pay on demand all costs and  expenses  of  collection,  including  reasonable
attorneys' fees, incurred or paid by Ventana in enforcing its note on default.

         Under the note,  MDI  covenanted  to  maintain  a system of  accounting
established  and  administered  in accordance  with sound business  practices to
permit the  calculation  of all amounts due under the note, and to promptly give
written notice to Ventana in reasonable detail of the occurrence of any event of
default, or any event,  condition or act, which with the giving of notice or the
passage of time or both, would constitute an event of default.


                                       27
<PAGE>

         As of June 30,  2005,  MDI had not  received a written  declaration  of
default from  Ventana.  As of June 30,  2005,  MDI had not paid and had recorded
principal and accrued interest outstanding of $21,000 and $1,577,  respectively,
with respect to the Ventana note.

         As discussed  above,  certain of these notes payable do not require the
noteholders  to provide notice upon an event of default while others require the
holder to  notify  MDI in  writing  of a  declaration  of  default.  There is no
guarantee that MDI would be able to cure any existing  event of default,  or any
declared event of default if, or when, the holder provides the required  written
notice. Indeed, given MDI's current financial condition,  receipt of notice from
or the pursuit of any remedy by any  significant  noteholder  demanding  payment
would  likely  have  an  adverse  material  impact  on the  Company's  financial
conditon, results of operations and liquidity. In addition, certain noteholders,
including the Bridge II noteholders  and Ungaretti & Harris LLP, have a security
interest in certain assets of the Company.  This could have severe  implications
for the Company and may impair control over its intellectual  property and other
assets,  assuming  the  Company  was  unable to cure a default  or  negotiate  a
settlement with such lenders,  in the event such lenders attempt to realize upon
the  collateral  securing  their debt. If the Company  continues to be unable to
obtain adequate additional  financing,  any additional financial strain from the
declaration  of defaults or otherwise may cause the Company to cease  operations
and seek bankruptcy protection.



ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

         At the Company's Annual Meeting of Stockholders  held on June 13, 2005,
the following proposals were adopted by the votes specified below:

1.       To elect the  following  nominees  to serve on the  Board of  Directors
         until  the  next  annual  meeting  of  stockholders   and  until  their
         successors are elected and qualified:

                                                   FOR             WITHHELD
         Denis M. O'Donnell, M.D.               62,918,321          649,120
         Alexander M. Milley                    63,029,996          537,445
         John H. Abeles, M.D.                   63,031,996          535,445

2.       To approve an amendment to the Company's  Certificate of  Incorporation
         (as amended to date) to  increase  the number of  authorized  shares of
         Common Stock ($.001 par value) of the Company by 75,000,000 shares from
         300,000,000 to 375,000,000 shares.

                                       FOR          AGAINST      ABSTAIN
                                    ----------     ---------     --------
                                    61,867,760     1,691,752        7,929

3.       To ratify the  appointment  of  Altschuler,  Melvoin and Glasser LLP as
         independent auditors of the Company for the fiscal year ending December
         31, 2005.

                                       FOR          AGAINST      ABSTAIN
                                    ----------     ----------    --------
                                    63,313,887        243,487      10,067

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

         See Exhibit Index.


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<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/ Denis M. O'Donnell, M.D.
                                                    ----------------------------
                                                    Denis M. O'Donnell, M.D.
                                                    Chief Executive Officer and
                                                    President

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

Date: August 15, 2005


                                       29
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
NUMBER                                  DESCRIPTION
-------  -----------------------------------------------------------------------

4.1      Form of common stock purchase warrant issued to financial consultant on
         May 2, 2005 representing the right to purchase 556,500 shares of common
         stock of the Company.

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.



                                       30