UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-QSB

(Mark One)

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

For the quarterly period ended March 31, 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 MAY 13, 2005:          111,375,204
<PAGE>

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

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                   Page
<S>                                                                               <C>
PART I. -- FINANCIAL INFORMATION

Item 1.  Financial Statements

a) Consolidated Balance Sheets -- March 31, 2005 (unaudited)
       and December 31, 2004 ................................................       3

b) Consolidated Statements of Operations -- Three months ended March 31, 2005
       and March 31, 2004 (unaudited) .......................................       4

c) Consolidated Statements of Cash Flows -- Three months ended March 31, 2005
       and March 31, 2004 (unaudited) .......................................       5

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

Item 2.  Management's Discussion and Analysis or Plan of
                  Operation .................................................      19

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 ................      24

Item 5.  Other Information ..................................................      24

Item 6.  Exhibits ...........................................................      25

SIGNATURES ..................................................................      25

EXHIBIT INDEX ...............................................................      26
</TABLE>


                                       2
<PAGE>

PART I. -- FINANCIAL INFORMATION

Item 1.  Financial Statements

                           MOLECULAR DIAGNOSTICS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                    March 31,  December 31,
                                                                                                      2005        2004
                                                                                                   ----------  ----------
                                                                                                   (Unaudited)
                                     Assets
<S>                                                                                                <C>         <C>
Current Assets:
Cash and cash equivalents ......................................................................   $        3  $       11
Accounts receivables, net of allowance for doubtful accounts of $0 at March 31,
         2005 and December 31, 2004 ............................................................           10          30
Inventories ....................................................................................           48          48
Prepaid financings costs .......................................................................           45          80
Prepaid expenses and other current assets ......................................................           13          14
                                                                                                   ----------  ----------
              Total current assets .............................................................          119         183
Fixed Assets, net ..............................................................................          289         326
Other Assets:
Licenses, patents and technology, net of amortization ..........................................           20          20
                                                                                                   ----------  ----------
              Total assets .....................................................................   $      428  $      529
                                                                                                   ==========  ==========

                 Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable ...............................................................................   $    4,357  $    4,426
Accrued payroll costs ..........................................................................          977       1,084
Accrued expenses ...............................................................................        2,003       1,944
Deferred revenue ...............................................................................           25          25
Due to stockholder .............................................................................           36          38
Lease obligation ...............................................................................          110         110
Notes payable--related party ...................................................................           70          70
Notes payable ..................................................................................        5,164       4,955
                                                                                                   ----------  ----------
              Total current liabilities ........................................................       12,742      12,652
                                                                                                   ----------  ----------

Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,119,192
     shares issued and outstanding at March 31, 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; 109,400,625 and 99,792,292 shares
issued and 109,208,537 and 99,600,204 shares outstanding at March 31, 2005 and December 31,
2004, respectively .............................................................................          110         100
Additional paid-in-capital .....................................................................       46,910      45,961
Treasury stock; 192,088 shares at March 31, 2005 and December 31, 2004 .........................         (327)       (327)
Accumulated deficit ............................................................................      (66,717)    (65,565)
Accumulated comprehensive loss--
         Cumulative translation adjustment .....................................................          (57)        (59)
                                                                                                   ----------  ----------
              Total stockholders' equity (deficit) .............................................      (12,314)    (12,123)
                                                                                                   ----------  ----------
              Total liabilities and stockholders' equity (deficit) .............................   $      428  $      529
                                                                                                   ==========  ==========
</TABLE>

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                  March 31,
                                                                  ---------
                                                             2005            2004
                                                         ------------    ------------
                                                                 (Unaudited)
<S>                                                      <C>             <C>
Net revenues .........................................   $         40    $         53
Operating expenses
         Cost of revenues ............................             --              --
         Research and development ....................             72             157
         Selling, general, and administrative expenses            717           1,415
                                                         ------------    ------------
              Total operating expenses ...............            789           1,572
                                                         ------------    ------------

Operating loss .......................................           (749)         (1,519)

Other income (expense):
         Interest expense - related party ............             (2)            (40)
         Interest expense ............................           (401)           (660)
         Gain on currency conversion .................             --              10
         Restructuring settlements ...................             --             161
                                                         ------------    ------------

              Total other income (expense) ...........           (403)           (529)
                                                         ------------    ------------
Loss before income taxes .............................         (1,152)         (2,048)
Income tax expense ...................................             --              --
                                                         ------------    ------------
 Net loss ............................................         (1,152)         (2,048)

Preferred stock dividend .............................           (225)           (312)
                                                         ------------    ------------
Total dividends ......................................           (225)           (312)
                                                         ------------    ------------

Net loss applicable to common stockholders ...........   $     (1,377)   $     (2,360)
                                                         ============    ============

Basic and diluted net loss per common share ..........   $      (0.01)   $      (0.04)
                                                         ============    ============

Weighed average number of common shares outstanding ..    104,343,116      55,812,649
                                                         ============    ============
</TABLE>

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


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                        March 31,
                                                                                        ---------
                                                                                    2005          2004
                                                                                 ----------    ----------
                                                                                (Unaudited)
<S>                                                                             <C>           <C>
Operating Activities:
 Net loss ...................................................................   $   (1,152)   $   (2,048)
Adjustments to reconcile net loss to net cash used for operating activities:
         Amortization of debt discount ......................................          176           464
         Depreciation and amortization ......................................           34           178
         Amortization of fees ...............................................           34           119
         (Gain) loss on sale of fixed assets ................................            3           (99)
         Note issued in payment of an expense ...............................           40            33
         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 ..           16           556
         Changes in assets and liabilities:
              Accounts receivable, net ......................................           20           (13)
              Inventories ...................................................           --            (6)
              Due from stockholder ..........................................           (1)           35
              Prepaid expenses and other current assets .....................            1            --
              Checks issued in excess of amounts on deposit .................           --            (5)
              Accounts payable ..............................................          (69)         (532)
              Lease Obligation ..............................................           --          (142)
              Accrued expenses ..............................................          (48)           95
                                                                                ----------    ----------
Net cash used for operating activities ......................................         (525)       (1,216)
                                                                                ----------    ----------

Cash used in investing activities:
Purchases of fixed assets ...................................................           --           (29)
                                                                                ----------    ----------
Net cash used for investing activities ......................................           --           (29)
                                                                                ----------    ----------

Cash flows from financing activities:
Proceeds from issuance of convertible notes payable .........................           --         1,292
Net proceeds from issuance of common stock ..................................          521            --
Payment of notes payable ....................................................           (4)          (30)
Proceeds from sale of fixed assets ..........................................           --            28
                                                                                ----------    ----------
Net cash provided by financing activities ...................................          517         1,290
                                                                                ----------    ----------
Effect of exchange rate changes on cash and cash equivalents ................           --            --
                                                                                ----------    ----------

Net increase (decrease) in cash and cash equivalents ........................           (8)           45

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

Cash and cash equivalents at end of period ..................................   $        3    $       45
                                                                                ==========    ==========

Supplemental disclosure of cash flow information: Cash paid during the period
for:
 Interest ...................................................................   $       25    $        2
Non-cash transactions during the period for:
Financing costs .............................................................   $       16    $      108
Preferred stock and cumulative dividends converted into common stock ........   $       --    $    3,346
</TABLE>

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


                                       5
<PAGE>

                           MOLECULAR DIAGNOSTICS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

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

      In addition to AccuMed and Oncometrics Imaging Corp., a wholly-owned
subsidiary of AccuMed, MDI had another wholly-owned subsidiary, Samba
Technologies, Sarl ("Samba"). MDI 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 three months of 2005, MDI
raised net proceeds of $521,050 through the sale of common stock. Management's
plans include efforts to obtain additional capital. If the Company is unable to
obtain adequate additional financing or generate profitable sales revenues, it
may be unable to resume its product development and other activities and may be
forced to cease operations.

Note 2. Basis of Presentation

      The consolidated financial statements for the periods ended March 31, 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.

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:


                                       6
<PAGE>

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

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

      Revenue Recognition. MDI recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition," when the following criteria
are met: shipment of a product or license to customers has occurred and there
are no remaining Company obligations or contingencies; persuasive evidence of an
arrangement exists; sufficient vendor-specific, objective evidence exists to
support allocating the total fee to all elements of the arrangement; the fee is
fixed or determinable; and collection is probable.

      Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is generally 12 months. Revenue from training
services and professional services is recognized when the service is completed.
Revenue from implementation and installation services is recognized using the
percentage of completion method. Implementation and installation services are
generally completed within 120 days.

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

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

      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 recorded on the Company's financial
statement as the amount due.

      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 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.

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.


                                       7
<PAGE>

         Licenses, patents, and technology are as follows:
                  (in thousands)

                                 March 31,    December 31,
                                   2005          2004
                                ----------    ----------
                               (unaudited)

Licenses ....................   $       20    $       20
Patent costs ................          133           133
MDI Technology Agreement ....           --            --
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 three months ended March 31, 2005 and 2004, amortization expense
was $0 and $131,000, respectively.

Note 5. Accrued Expenses

         Accrued expenses included the following:
                   (in thousands)
                                     March 31,   December 31,
                                       2005         2004
                                    ----------   ----------
                                    (unaudited)

Accrued interest ................   $    1,051   $      994
Accrued interest--related party .           27           25
Accrued settlement costs ........          438          438
Accrued franchise and other taxes          476          476
Other accrued expenses ..........           11           11
                                    ----------   ----------
        Total ...................   $    2,003   $    1,944
                                    ==========   ==========

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

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

      MDI is also delinquent in filing certain federal and state income tax
returns for 2003 and 2002 and is working to complete and file the returns. 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.


                                       8
<PAGE>

Note 6. Notes Payable--Related Parties

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

<TABLE>
<CAPTION>
                                                                                     March 31,  December 31,
                                                                                       2005         2004
                                                                                    ----------   ----------
                                                                                    (unaudited)
<S>                   <C>                                                           <C>          <C>
Northlea Partners, Ltd., $25,000 Promissory Note issued August 6, 2001;
        interest rate 15% per annum .............................................   $       25   $       25
Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001;
        interest rate 9% per annum ..............................................           15           15
Northlea Partners, Ltd., $15,000 Bridge II Convertible Promissory Note issued
        May 1, 2003; interest rate 12% per annum (see description under Bridge II
        Notes in Note 7-Notes Payable for other terms and conditions) ...........           15           15
Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate
        9% per annum ............................................................           15           15
                                                                                    ----------   ----------
                                                                                    $       70   $       70
                                                                                    ==========   ==========
</TABLE>

      Peter Gombrich Amounts Due. Peter Gombrich, the Company's former Chairman
and CEO, was owed $36,481 and $37,299 at March 31, 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 or possible conversion and the Company's current financial
condition.

Note 7. Notes Payable

         Notes payable to unrelated parties consisted of:
                          (in thousands)
<TABLE>
<CAPTION>
                                                                                                March 31,   December 31,
                                                                                                   2005         2004
                                                                                                ----------   ----------
                                                                                               (unaudited)
<S>                                            <C>                                              <C>          <C>
Bridge I Convertible Promissory Notes; due December 31, 2002; interest
        rate 7% per annum; convertible into common stock at 75% of the market price on
        date of conversion; beneficial conversion feature valued at $1,042,000 at June
        30, 2002; warrants at an exercise price of $0.25 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, 2003; interest rate
        12%/15% per annum; convertible into common stock at $0.10 or $0.15 per share;
        beneficial conversion feature valued at $1,777,000 and $330,000 at December 31,
        2003 and 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 ...................................................          351          268
Bridge IV Convertible Promissory Notes; due December 31, 2008; interest rate 10%
        per annum; convertible into common stock at $0.10 per share; beneficial
        conversion feature valued at $1,791,000 at June 30, 2004;
        warrants at an exercise price of $0.15 per share ....................................        1,177        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 .....................................................          822          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


                                       9
<PAGE>

        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 ......................................................................            3            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 ..........................................          236          239
                                                                                                ----------   ----------
                                                                                                $    5,164   $    4,955
                                                                                                ==========   ==========
</TABLE>

      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 March 31, 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 March 31,
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 March 31, 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 bear interest at a rate of 12% per annum payable at the maturity date in
kind in the form of shares of common stock of MDI. The Company granted the
holders a junior security position in all of its assets. The notes are
convertible at any time into the common stock of MDI. The note conversion price
and the value of common shares paid in kind as interest for the first $1,000,000
in principal amount of cash subscriptions, determined on a "first come - first
served basis," is $0.10 per share. The note conversion price and the value of
common shares paid in kind as interest for the remaining $3,000,000 of principal
amount of notes in the series is $0.15 per share. The conversion prices of the
notes issued during 2002 and 2003 were less than the market price of the common
stock when the notes were issued; therefore, the holders are considered to have
a beneficial conversion feature. MDI determined the value of the beneficial
conversion feature to be $1,777,200 and $330,000 at December 31, 2003 and 2002,
respectively. The value was recorded as a reduction of the debt and was
amortized as additional interest over the life of the notes. MDI recorded


                                       10
<PAGE>

additional interest expense of $334,909 and $1,826,743 to reflect amortization
of the discount during the twelve months ended December 31, 2004 and 2003,
respectively.

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

      For the 12 months ended December 31, 2004, holders of $2,146,000 principal
amount of Bridge II convertible promissory notes elected to convert their notes
and related accrued interest of approximately $251,000 into 17,619,242 shares of
unregistered common stock. Included in the above conversion amounts are amounts
due Peter P. Gombrich, the Company's former Chairman, of $305,667 in Bridge II
principal and $11,431 in accrued interest thereon, which were converted into an
aggregate 2,113,987 shares of unregistered common stock. The remaining
$1,300,000 in principal Bridge II notes remained unconverted and outstanding at
March 31, 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
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 $83,436 and
$208,595 to reflect amortization of the discount during the 3 months ended March
31, 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


                                       11
<PAGE>

principal amount of Bridge III convertible promissory notes in exchange for
cash, all of which remained unconverted and outstanding at March 31, 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 $92,196 and $302,288 to reflect amortization of the discount during
the 3 months ended March 31, 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 March
31, 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 20% per year and was originally due 12 months from the date of
issue. The note is convertible into common stock, any time after the expiration
of the first 180 days of the loan term, at a conversion price of $1.00 per
share.

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

      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.

      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


                                       12
<PAGE>

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 issued a note for $150,000 to the law firm, payable in
installments of $25,000 commencing March 22, 2005, and with subsequent payments
due in ninety day increments until the balance is paid in full.

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

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

Note 8. Stockholders' Equity

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

<TABLE>
<CAPTION>
                                                                                   March 31,         December 31,
                                                                                     2005                2004
                                                                                     ----                ----
                                                                                Shares Issued &     Shares Issued &
         Offering                                                                 Outstanding         Outstanding
                                                                                  (unaudited)
         <S>                                                                    <C>                <C>
         Series A convertible..............................................            82,655             82,655
         Series B convertible, 10% cumulative dividend.....................           365,106            365,106
         Series C convertible, 10% cumulative dividend.....................           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>

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


                                       13
<PAGE>

Series B Convertible Preferred Stock
Liquidation Value:           $4.00 per share
Conversion Price:            $1.00 per share
Conversion Rate:             4.00--Liquidation Value divided by Conversion
                             Price ($4.00/$1.00)
Voting Rights:               None
Dividends:                   10%--Quarterly--Commencing March 31, 2001
Conversion Period:           Any time
Cumulative dividends in arrears at March 31, 2005 were $609,351

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 March 31, 2005 were $269,117

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 March 31, 2005 were $597,877

Series E Convertible Preferred Stock
Liquidation Value:           $22.00 per share
Conversion Price:            $0.80 per share
Conversion Rate:             27.50--Liquidation Value divided by Conversion
                             Price ($22.00/$0.80)
Voting Rights:               Equal in all respects to holders of common shares
Dividends:                   10%--Quarterly--Commencing May 31, 2002 Conversion
                             Period:Any time
Cumulative dividends in arrears at March 31, 2005 were $1,675,679

      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. In the
first quarter of fiscal 2005, the Company had received net aggregate proceeds of
$521,050 and 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 as a Settlement

      On July 18, 2003, Mr. Milley, a director of MDI, Azimuth Corporation (of
which Mr. Milley is President and Chairman of the Board) and Cadmus Corporation
(of which Mr. Milley is President), agreed to cancel seven warrants held by
Azimuth and one warrant held by Cadmus, which warrants entitled the holders to
purchase a total of 3,125,000 shares of MDI common stock at various exercise
prices between $0.01 and $1.25 per share. The warrants, issued between December


                                       14
<PAGE>

1999 and August 2001, contained anti-dilution clauses which required MDI to
increase the number of shares of common stock the holders were entitled to
purchase under the warrants by approximately 1,500,000 shares as of the date of
the agreement, with commensurate adjustments in individual exercise prices so
that gross proceeds to the Company from exercise of the warrants remained the
same. These anti-dilution provisions could have required the Company to make
additional adjustments in shares and exercise prices in the future based on the
Company's issuance of debt or equity instruments at prices below the adjusted
exercise prices of these warrants. In consideration for the parties' agreement
to cancel these warrants, including their individual anti-dilution clauses, and
the forgiveness of approximately $100,000 owed to Azimuth and Cadmus, in
February 2005 MDI issued warrants to purchase 2,875,000 and 3,625,000 shares to
Azimuth and Cadmus, respectively, at an exercise price of $0.30 per share. MDI
had also agreed to issue a 120-day warrant entitling the holders to purchase
500,000 shares of common stock at an exercise price of $0.30, which warrant
expired on November 19, 2003. MDI valued the warrants at $420,551 using the
Black-Scholes valuation model and recorded the amount as a current quarter
administrative expense.

      Issuance of Warrants for Services

      In February 2005, MDI issued warrants to purchase 200,000 shares of common
stock with an exercise price of $0.10 per share to a non-employee financial
consultant for past financial services. MDI valued the warrants at $16,260 using
the Black-Scholes valuation model and recorded the amount as a current quarter
administrative expense.

      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 4.88% and 4.77%
for the March 31, 2005 and 2004 periods, respectively; volatility factors of
146% and 182%, respectively; and a fair value of the underlying common shares of
the closing market price on the date of the grant. The expected life equaled the
term of the warrants, options, or restricted shares.

Note 9. Equity Incentive Plan and Employee Stock Purchase Plan

      On May 25, 1999, stockholders approved the establishment of the 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 first quarter of 2005 or 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 three months ended March 31,
                                                                          2005             2004
                                                               (in thousands except for per share amounts)
<S>                                                                    <C>              <C>
Net loss applicable to common shareholders as reported.............    $  (1,377)       $  (2,360)
Deduct: Total stock-based compensation determined
under the fair value based method for all awards and
forfeitures, net of related taxes..................................           (3)            (158)
                                                                       ----------       ----------
Pro forma net loss applicable to common shareholders...............    $  (1,380)       $  (2,518)
                                                                       ==========       ==========

Basic and diluted loss per share applicable to common
shareholders - as reported.........................................    $  (0.01)        $   (0.04)
                                                                       =========        ==========
Basic and diluted loss per share applicable to common
         shareholders - pro forma..................................    $  (0.01)        $   (0.05)
                                                                       =========        ==========
</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 4.88% and 4.77% for the March 31, 2005
and 2004 periods, respectively; volatility factors of the expected market price
of the Company's common stock of 146% and 182%, respectively; and a fair value
of the underlying common shares of the closing market price on the date of the
grant. The expected life equaled the term of the 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 ......................           --
Forfeited ......................      (30,000)   $   0.9210
                                   ----------
Outstanding at March 31, 2005 ..    4,917,727
                                   ==========
Exercisable at March 31, 2005 ..    3,591,061    $   0.8450
                                   ==========

      At the Annual Meeting on May 25, 1999, the stockholders also approved the
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)"). 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

      In April 2005, MDI, as part of its current common stock offering, offered
common stock to accredited investors in exchange for cash. For the month ended
April 30, 2005, the Company had received additional net proceeds of $117,000 and
was obligated to issue 2,166,667 shares of restricted common stock and warrants
to purchase an aggregate 541,667 shares of common stock at $0.10 per share in
connection with such offering.

Note 11. Legal Proceedings

      Settled in the First Quarter of Fiscal 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


                                       16
<PAGE>

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 the first quarter of 2005,
the parties agreed in principle to terms of settlement and are currently working
on a definitive settlement agreement. MDI's last settlement payment is expected
to be in July 2005, at which point it is expected that the default judgment will
be deemed fully satisfied.

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

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

      Pending as of March 31, 2005

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

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

      In November 2002, the Board of Directors approved the issuance of 200,000
shares of common stock to Monsun to satisfy a default penalty clause in the
guaranty. The terms of the guaranty required that Monsun receive registered
shares of our common stock; however, in order to comply with securities laws,
MDI issued the shares of common stock to Monsun with a restrictive legend, which
permits their sale only in compliance with Rule 144 of the Securities Act of
1933, as amended. MDI recorded the principal amount of the note plus accrued and
unpaid interest to December 31, 2003 as a note payable on its records. In March
2004, Monsun obtained a judgment against Mr. Gombrich in the amount of $675,199.
In July 2004, Monsun obtained a second judgment against Mr. Gombrich in the
amount of $438,419 for attorney fees and costs incurred in enforcing the
guaranty agreement. Those judgments remain unsatisfied. Monsun has not filed
suit directly against MDI to recover any amounts due under the note or
otherwise.

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

      Medical College of Georgia Research Institute, Inc. On November 18, 2003,
the Medical College of Georgia Research Institute, Inc. filed suit against MDI
in the Superior Court of Richmond County, Georgia (Case No. 2003-RCCV-1211) to
collect amounts allegedly due pursuant to an agreement to provide a clinical
study for MDI. Georgia Research Institute claimed that the principal amount of
the obligation due from MDI was approximately $86,700, but sought to collect
approximately $315,300 pursuant to an interest provision of 10% per month. On


                                       17
<PAGE>

October 27, 2004, the court entered summary judgment in favor of Georgia
Research Institute and against MDI in the amount of $68,404. MDI expects to
propose terms of settlement to satisfy this judgment in 2005.

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

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

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

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

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

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

      Peter Gombrich. On April 25, 2005, former MDI officer 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
alleged a claim against MDI for contribution and indemnification regarding
agreements he signed as a guarantor for certain alleged MDI obligations. MDI has
not yet responded to the complaint.

      Miscellaneous

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


                                       18
<PAGE>

duties made by the Company against the President of MonoGen, Norman Pressman,
who had been the President of both AccuMed and Oncometrics at the time the
License Agreements had been entered into by the parties.

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

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

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

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

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

Item 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 and assumptions currently available to
the Company and are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or those anticipated
or implied by such forward-looking statements. These risks are described more


                                       19
<PAGE>

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

      The science of medical diagnostics has advanced significantly during the
past decade. Much of this advance has come as a result of new knowledge of the
human genome and related proteins, which form the foundation of cell biology and
the human body. Our goal is to utilize this research as a base to develop
screening and diagnostic testing products for cancer and cancer-related
diseases. We believe that the success of these products will improve patient
care through more accurate test performance, wider product availability and more
cost effective service delivery. We are developing 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 to a
settlement agreement with Dr. Bruce Patterson and Invirion, Inc. over the
validity of a certain technology license. MDI agreed to the termination and
return of the license to Dr. Patterson and Invirion.

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

      The Company has incurred significant operating losses since its inception.
Management expects that significant on-going operating expenditures will be
necessary to successfully implement MDI's business plan and develop, manufacture
and market its products. These circumstances raise substantial doubt about MDI's
ability to continue as a going concern. Implementation of the Company's plans
and its ability to continue as a going concern depend upon its securing
substantial additional financing. During the first three months of 2005, MDI
raised net proceeds of $521,050 through the sale of common stock. Management's
plans include substantial efforts to obtain additional capital. If the Company
is unable to obtain adequate additional financing or generate profitable sales
revenues, it may be required to curtail its product development and other
activities and may be forced to cease operations.

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


                                       20
<PAGE>

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 Policies in the Notes to Consolidated
Financial Statements included in this Quarterly Report on Form 10-QSB, as well
as our Annual Report on Form 10-KSB for the fiscal year ended December 31, 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 March 31, 2005 as compared to Three Months Ended March
31, 2004

      Revenue

      Revenues for the three months ended March 31, 2005 decreased $13,000, or
24.5%, to $40,000 from revenues of $53,000 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.

      Costs and Expenses

      Cost of Goods Sold

      Cost of goods sold was zero for the quarters ended March 31, 2005 and
March 31, 2004, respectively.

      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 March 31, 2005, our R&D expenses were $72,000, a
decrease of $85,000, or 54.1%, 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
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 March 31, 2005, selling, general and administrative
expenses ("SG&A") were $717,000, a decrease of $698,000, or 49.3%, over expenses
of $1,415,000 for the same period in 2004. This decrease included a reduction of
$406,000 in financing costs, $67,000 in investor relations expenditures, $94,000
in other general and administrative costs and $131,000 in legal and professional
fees.

      Significant components of SG&A are compensation costs for executive, sales
and administrative personnel; professional fees primarily related to legal and


                                       21
<PAGE>

accounting services; travel costs; fees for public and/or investor relations
services; insurance premiums; facilities and office expenses; marketing-related
costs; and amortization/depreciation charges.

      Other Income and Expense

      Interest Expense

      Interest expense, including interest expense to related parties, decreased
$297,000 for the first quarter ended March 31, 2005 to $403,000, a decrease of
42.4% 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
$5,297,000 for the fiscal quarters ended March 31, 2005 and 2004, respectively.
The change included an decrease in interest expense of $10,000 related to the
lower interest rates on the Bridge III and IV notes and a decrease of $289,000
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.

      Restructuring Settlements

      For the quarter ended March 31, 2005, MDI did not record any restructuring
settlements, a decrease of $161,000 or 100% over the same period in 2004. The
gain recorded during the quarter ended March 31, 2004 resulted from the
settlement of various litigation and credit payment matters during that period.

      Net Loss

      The net loss for the three-month period ended March 31, 2005 before
preferred dividends totaled $1,152,000, compared with $2,048,000 for the same
period in 2004, a decrease of $896,000 or 43.8%. 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 $225,000 for the quarter ended March 31, 2005, compared
with $312,000 for the same period in 2004. The net loss applicable to common
stockholders for the three months ended March 31, 2005 was $1,377,000, or $0.01
per share, on 104,343,116 weighted average common shares outstanding. This
compared with the net loss applicable to common stockholders for the three-month
period ended March 31, 2004 of $2,360,000, or $0.04 per share, on 55,812,649
weighted average common shares outstanding.

Liquidity and Capital Resources

      Research and development, clinical trials and other studies of the
components of our InPath System, conversions from designs and prototypes into
product manufacturing, initial sales and marketing efforts, medical consultants
and advisors, and research, administrative, and executive personnel are and will
continue to be the principal basis for our cash requirements. We have provided
operating funds for the business since its inception through private offerings
of debt and equity to limited numbers of U.S. and foreign accredited investors.
We will be required to make additional offerings in the future to support the
operations of the business until some or all of our products are introduced into
the market. We used $525,000 and $1,216,000 for the first quarter ended March
31, 2005 and 2004, respectively, in operating activities.

      We experienced severe liquidity problems during the quarter ended March
31, 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 quarter 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 at that time as well as for the payment of a limited
amount of current operational expenses.

      At March 31, 2005, we had $3,000 cash on hand, a decrease of $8,000 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 companies in general, and especially for small life sciences companies such
as ours. We were unable to raise sufficient funds during the quarter to maintain
adequate cash reserves and to meet the ongoing operational needs of the
business.


                                       22
<PAGE>

      We incurred no capital expenditures during the first quarter of 2005
versus capital expenditures of $29,000 for the first quarter 2004, a decrease of
100%. Capital expenditures are defined as disbursements for laboratory
equipment, leasehold improvements, software, and furniture/fixtures with a
purchase price in excess of $1,000 per item and useful life in excess of one
year. MDI is striving to keep capital expenditures to a minimum due to capital
and liquidity constraints, and the Company has no plans for material commitments
for capital expenditures in the near-term.

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

Off-Balance Sheet Arrangements

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

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      Our chief executive officer and chief financial officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this quarterly report. Based on that review and evaluation,
our chief executive officer and chief financial officer have concluded that our
current disclosure controls and procedures, as designed and implemented, are
reasonably adequate 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 pending and threatened legal proceedings, which information is
incorporated herein by reference.

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

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 first quarter of fiscal 2005, the Company had received net
aggregate proceeds of $521,050 and 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 as to additional paid-in-capital -
warrants for the quarter ended March 31, 2005.


                                       23
<PAGE>

      Warrants. In February 2005, MDI issued warrants to purchase an aggregate
6,500,000 shares of common stock of the Company with an exercise price of $0.30
per share to Azimuth Corporation and Cadmus Corporation in exchange for such
warrant holders' agreement to cancel certain other warrants containing
anti-dilution provisions unfavorable to the Company. MDI valued the warrants at
$420,551 using the Black-Scholes valuation model and recorded the amount as an
administrative expense in the first quarter ended March 31, 2005.

      In February 2005, MDI issued warrants to purchase 200,000 shares of common
stock of the Company with an exercise price of $0.10 per share to a non-employee
financial consultant for past financial services. MDI valued the warrants at
$420,551 using the Black-Scholes valuation model and recorded the amount as an
administrative expense in the first quarter ended March 31, 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 first 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 March 31, 2005, MDI had failed to make the required principal and
interest payments, constituting events of default, on the following notes
payable:

      o     $750,000 in Bridge I convertible promissory notes;

      o     $1,300,000 in Bridge II convertible promissory notes;

      o     $822,000 Monsun AS convertible promissory note;

      o     $149,000 Ungaretti & Harris LLP secured promissory note;

      o     $31,000 Ernst & Young LLP promissory note;

      o     $305,000 MonoGen, Inc. promissory note and;

      o     $21,000 Ventana Medical Systems, Inc. promissory note

      The notes payable require the holder to notify MDI in writing of a
declaration of default at which time a cure period, as specified in each
individual note, would commence. There is no guarantee that MDI would be able to
cure any event of default if, or when, the holder provides the required written
notice. Other than the Monsun AS convertible promissory note, the MonoGen note
payable, and the note payable to Ungaretti & Harris, which are the subject of
legal actions referred to in Part II, Item 1 above and in Note 11 - Legal
Proceedings in the Notes to Consolidated Financial Statements included herein
(certain of which have been settled as described herein), MDI has not received
any written declarations of default from holders of outstanding notes payable.


                                       24
<PAGE>

Item 4. Submission of Matters to Vote of Security Holders

      None

Item 5. Other Information

      None

Item 6. Exhibits K

      See Exhibit Index


                                       25
<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: May 19, 2005


                                       26
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                            Description

4.1         Form of common stock purchase warrant issued to financial consultant
            on February 15, 2005 representing the right to purchase 200,000
            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.


                                       27